Sections 187 to 187D

Representation of corporations at meetings of companies and of creditors, etc.

[1984] 55 COMP. CAS. 375 (DELHI)

High Court OF Delhi

Motion Pictures Association, In Re

S.B. WAD, J

Rajindar Sachar and M.L. Jain JJ.

COMPANY APPEAL NO. 23 OF 1981,

COMPANY APPlication NO. 94 OF 1981, AND

COMPANY PETITIONER NO. 58 OF 1979

December 18, 1981

Satish Chandra, Manmohan Krishan, K.K. Mehra and Ms. Anjana Goswami for the Petitioner.

G.L. Rawal, and A.N. Parekh for the Respondent.

JUDGMENT

S.B. Wad J. (1, 12-10-1981)—On October 1, 1981, I have passed an order appointing an administrator for the Motion Pictures Association and he has assumed charge. Ordinarily, I would have passed a reasoned order if there was sufficient time left for me. But the counsel for some members of the executive committee was so persistent in my passing an immediate order that there was no alternative. He filed a separate C.A. for the purpose. His complaint was that the business of crores of rupees is affected and the management has come to a grinding halt. He also complained that the petitioners were avoiding early orders being passed. My illness and intervening holidays delayed the matter a little. The reasons for the order are now stated.

Motion Pictures Association is a company under section 25 of the Companies Act, controlling distribution and exhibition of Hindi Films (mostly) in the Northern region. The management and the working of the company are the subject-matter of innumerable proceedings in this court and subordinate courts for the last over ten years. These litigations broadly concern the complaints of mismanagement and oppression by a group of persons which is deeply entrenched in the executive committee and the sub-committee of the company. The story of Motion Pictures Association has a touch of Hitchcock Mystery. If it lacks fitness or if there are any loose ends, that is because it is a local version of the original film (Bombay "Fillum" as is described by cine critics).

The company is unique in the sense that by itself it does not carry out any commercial or business venture but indirectly control business of crores of rupees every year. Its articles of association are so framed that every member is required to register a picture with the company. Every distributor and exhibitor is also required to register himself with the company. The members are prohibited from entering into any contract for distribution and exhibition of the films to non-members. The articles also provide for resolving of disputes between the members in regard to their claims. A member who deals with the non-member or who does not pay dues of other members is liable to be removed from the membership. During the course of hearing of these matters before me and particularly in the chamber discussions, the role of black money was also openly discussed. The underlying theme of the repeated complaints in this court is that these apparently simple provisions are grossly abused by a group of people for personal ends and oppression of other members for over a decade. The powers are so formidable that the company can completely throw a member out of cinematographic business which no other company can do. This action is in restraint of trade and denial of fundamental right under art. 19 of the Constitution.

Unfortunately, this court has not fully and exhaustively pronounced on these complaints of mismanagement and oppression so far. The long delay in disposal of these cases results in a flagging of the interest of the complainants. Some complaints become stale by passage of time or because some further acts of oppression overtake them. Some become still born by the technique of compromise developed by the dominating group.

The scope of the enquiry and the relief, which can be granted under ss. 397 and 398 of the Companies Act, are now exhaustively set out by the judgment of the Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdivg Ltd. [1981] 51 Comp Cas 743 (SC). The Supreme Court has summarised the decisions of the English Courts and the Supreme Court rendered so far. An oppressive conduct means a conduct which is burdensome, harsh and wrongful. The conduct of a company is expected to be of utmost good faith. The jurisdiction under ss. 397 and 398 is a "just and equitable" jurisdiction. A conduct which is technically legal and correct may nevertheless be such as to justify the application of the "just and equitable" jurisdiction. An isolated act, which is contrary to law, may not necessarily and by itself support the inference that the law was violated with the mala fide intention or that such violation was burdensome, harsh and wrongful but a series of illegal acts falling upon one another can, in the context, lead justifiably to the conclusion that they are part of the same transaction of which the object is to cause or commit the oppression of persons against whom those acts are directed. The Supreme Court has further summarised the scope of the powers of the company court in this regard. It has been held that the power conferred on the court to grant a remedy in an appropriate case appears to envisage reasonably wide discretion vested in the court in relation to the order sought by a complaint as the appropriate equitable alternative to a winding-up order. The Supreme Court has further held that even if a company petition fails the court is not powerless to do substantial justice between the parties and place them, as nearly as it may, in the same position as they would have been.

Considering the history of the litigation since 1972, and repeated complaints of mismanagement and oppression, I am convinced that at least for some time, the ruling group (sitting in the executive committee and sub-committees) which is entrenched since 1969, should be kept away from the control of the company. The general body of 1,500 members hardly meets. These are the distributors and exhibitors spread all over the Northern region of India. It is difficult for them to know about the mismanagement and its extent as the general body hardly meets. On the other hand, the members are at the mercy of the small group even for their survival in their trade and business. These factual conclusions are borne out by the orders of this court from time to time ever since 1973. Strenuous efforts were made by Rangarajan J., Anand J. and Dalip Kapoor J. as company judges during the last ten years to set right the management of the company. Various remedial measures were taken and warnings given. But they have fell on deaf ears. Every time new and additional acts of mismanagement are brought to the notice of the court. The malady persists unabated. The learned judges refrained from superseding the board as they sincerely thought that the remedial measures would cure the malady. But now there seems to be no alternative but to appoint an administrator for the company, and supersession of the management. There are some reasons why I avoided this action so far.

It would be relevant at this stage to have an overview of the various stages of the controversy and the strenuous efforts made by company judges for the last decade. The first part of the remedial steps taken by the company judges from time to time was regarding annual elections and election of office bearers. From 1969 to 1972 no elections were held. The normal pattern is not to hold elections on the due dates as required by the Companies Act or not to hold elections at all. If the articles of association or the election rules are changed on the eve of the elections the members are obliged to take legal proceedings restraining the company from holding the elections. The courts pass an interim order restraining the company from holding elections and proceedings continue. This suits the dominant group very well because they are able to continue in power. They agree to a compromise of not holding elections. This is what happened in Suit No. 476 of 1970. In C.P. No. 30 of 1979, one member, Mr. J.S. Sood, who by that time had joined the dominating group moved the said application for the direction that the annual general meeting should not be held in June, 1979. He was elected to the executive committee on February 28, 1979, which itself was a delayed election. After the statutory period was over, that is, on August 30, 1979, the company judge passed an order that pending further orders the company would not take any steps to convene the annual general meeting. Annual general meetings for the year 1971 were held under the orders of the court. The 1972 elections for the office bearers were found to be illegal by this court and fresh elections were ordered to be held under the observations of this court. A detailed procedure for election was also laid down by this court. This is the subject-matter of the decision of this court in (In the matter of Motion Pictures Association, Delhi) [1974] 44 Comp Cas 298; [1973] ILR 2 Delhi 624. A meeting thereafter took place on October 13, 1973. No meeting was called in 1974 and, therefore, by June 30, 1974, the term of the directors/executive committee members had lapsed. Even by now the annual accounts ending 31st December, 1969, to 31st December, 1973, had remained to be adopted. In C.P. No. 106 of 1974, this court by its powers vested under s. 186 of the Act directed a meeting to be held on 1st March, 1975, further laying down the procedure for elections and appointing the court officers to conduct the election.

One effect of not holding the elections in time is that two sets of directors/executive committee members claim to be de jure directors, adding to the mismanagement of the company. This situation was brought to the notice of this court in C.P. No. 106 of 1974 (B.R. Kundra v. Motion Pictures Association, [1975] ILR 1 Delhi 692). The same problem cropped up again in 1976 in C.P. No. 32/76. In the first case the company judge directed new elections of the office bearers declaring that the effect of not holding the election on due date was the automatic vacation of the office by the board of directors. The court also directed fresh elections to be held under the auspices of the court. In the second case the company judge directed that the Hony. Secretary would discharge the functions of the executive committee as an interim measure. But this intervention by the court did not improve the things much.

The court found that some change in the articles of association would improve the situation. The company judges from time to time had expressed the need for it? This was the second remedial measure taken by the company judge. By order dated February 20, 1978, passed in C.P. No. 32 of 1976, a number of articles were amended. The learned company judge observed:/. "There are many defects in the existing articles which are partly due to multiple membership as a single person, who is a member of several different concerns, can have more than one vote. This itself leads to a kind of groupism because persons with higher financial stakes having more concerns are able to exercise a greater control over the company and they have also got an advantage in the running of the association because they are easily elected........further more, the rules regarding the election of office bearers, compulsory arbitration between the parties and the general running of the association including the settlement of the dispute between members and the possibility of debarring the members on account of defaults, malpractices and so on are defective in many respects". The company judge also modified partially the election rules. Bat for appreciating this measure we must see C.P. No. 32/76.

C.P. No. 32/76 was filed by B. R. Kundra and others under ss. 155, 397 and 398 of the Companies Act. The petition was filed by Shri K.K. Mehra, Advocate on December 6, 1976. The grounds of mismanagement and appression mentioned in the petition were as follows;

(1) Bye-laws were framed in direct contravention of the memorandum and articles for wholesale dismembership on flimsy grounds.

(2) The power of dismembership was used to eliminate dissent and opposition.

(3) The office bearers were misusing their powers to further their own ends and to take undue advantage and monetary gains at the expense of other members. For example, persons who had obtained old and repeat-run pictures were not allowed to become the members of the company. Persons close to the dominant group and particularly Joginder Singh got the benefit of registration of repeat-run pictures.

(4) If a member has defaulted in payment to another member he is removed from the membership. No member can thereafter deal with such a member and his whole business comes to a standstill. This power was abused by giving low instalments of payments to defaulting members supporting the dominant group, while the members opposing were directed to pay the whole amount in lump sum.

(5) The pictures belonging to a defaulting member are misappropriat ed by the ruling group and is not allowed to do business. For example, the prints of picture, "Sagina", belonging to a defaulting member were retained by the vice-president and another close associate of the general secretary They were running the said picture and recovering their amounts by such trick.

(6) The idea behind the formation of the company was to promote the trade and safeguard the interest of persons dealing in production, distribution, exhibition and exploitation of motion pictures. But the office bearers were exploiting the members for their personal gains. For example, a number of office bearers have earned plumbs (sic) and booking of various cinemas, of as large a number as 8 to 23.

(7) The effort of the ruling group is, on the one hand, not to make new members and, on the other hand, dismembering such persons who were opposed to them.

It was prayed in the said petition that Shri D.N. Gupta, Shri Joginder Singh, Shri N.B. Mathur and Shri Narain Dass who were the perpetrators of the oppression be debarred for a period of at least five years from holding any office under the Companies Act. It was also prayed that every person who is engaged in the trade of motion pictures should be permitted to become a member of the association. Articles of association should be suitably amended to see that the dominant group was not able to continue its hold on the company and to give proper representation to the minority in the board of directors, etc.

After the filing of the petition various company applications were filed. Most of the allegations made in the main company petition and the company applications were accepted by the company judges. Some such company applications were disposed of by Anand J. on May 3, 1976. It is clear from the order that Anand J. was more than convinced about the mismanagement and oppression by the ruling group in the company. The learned judge come to this conclusion on certain undisputed facts and by perusing various reports submitted by Mr. A.L. Joshi, advocate, who was appointed as a court observer to attend the meetings of the executive committee of the company. It is worthwhile to read the said order and the reports of Mr. Joshi, advocate, in original. However, some observations made by the learned judge are pertinent for understanding the complex nature of the dispute perpetuating in the company for over a decade.

Justice Anand observed: "The basic hypothesis on which the petitioner justifies relief is, by and large, undisputed. It is not in dispute that the present management of the company had over the years been in the control of the group either by themselves or through their associates......It is also undisputed that during the last many years there has been discontent among the sections of the membership of the company............It is also not in dispute that allegations of oppression of the minority and of mismanagement have not been made for the first time in the present proceedings and this court had occasion to consider such allegations even earlier when certain remedial directions were made by Rangarajan J". Anand J. has further observed: "The apprehension that the minority, which has taken cudgels against the majority, which is said to be in the control of the management, is likely to be subjected to vindictive action, cannot be altogether brushed aside either as unwarranted or unreasonable and in the situation that has emerged, there is a possibility that the management of the company may be conducted in a manner that may be prejudicial to the interest of the minority and, therefore, to that extent, prejudicial to the interest of the company. Such a possibility would ordinarily justify protective measure by court in proceedings of the present nature but this is more so where the membership of the company, unlike the membership of the other companies, does not involve merely the return on the capital or the right to participate in the management of the affairs of the company, but may even prejudicially affect the very right of a member to carry on trade within the certain territory".

In various applications moved in C.P. No. 32 of 76, the following orders were passed by the court:

(1) C.A. No. 334/76:

The company was directed to maintain status quo and was restrained from expelling any member except with the leave of the court. Mr. A.L. Joshi, advocate, was appointed as a court observer to attend the meeting of the executive committee. He attended the meetings for over a year and submitted reports on various irregularities and acts of oppression.

(2) C.A. No. 720/76, C.A. No. 103/77 and C.A. No. 4/77:

Considering the fact that the expulsion of a member completely prohi bits such a person from carrying on cinema trade, detailed directions were given regarding procedure to be followed when a member is to be expelled for non-payment of dues. A full procedure for notice, enquiry, reasonable opportunity to a member to present his case, etc., was ordered by the court. A member was also given liberty to move this court in case of unjustified expulsion.

(3) C.A. No. 736/76 :

This application related to supersession of the executive committee or in the alternative suitable representation for the minority group on the committee. On August 30, 1976, Kapoor J. directed annual general meeting to be held which was held on September 29, 1976, Kapur J. observed: that the holding of the annual general meeting and the election of the new executive committee would not prejudice the court's power to supersede the "board", if necessary. Justice Anand found that Mr. A.L. Joshi, advocate, who was appointed as an observer could not effiectively protect the interest of the minority group. It was ordered that a special meeting of the company should be held presided over by Satya Dev Sharma, advocate, and elect two members outside the executive committee members to be the additional directors. The court found that with these steps there will be no need for supersession of the executive committee.

(4) C.A. No. 180/77:

This application related to imposition of unreasonable penalties, non-registration of a picture where a member owes some money to other members and improprieties in relation to appointment of arbitrators for settling dispute between the parties. As regards the registration of pictures where the dues are outstanding, the company promised that no discrimination would be made. No order was, therefore, found necessary. The court further directed that no penalty would be imposed on account of delay in registration of a picture without granting to the affected person reasonable opportunity of being heard. The learned judge further directed that a person interested in the picture belonging to a particular member or is hostile to him, should not be appointed as an arbitrator in his dispute with another member. The court constituted a panel of four advocates who could work as arbitrators if the company and a member do not agree on any.

Against the orders of Kapur J. to hold the elections, the dominant group preferred an appeal. Certain assurances were given on behalf of the executive committee members of the company to the appellate court. Mr. B.R. Kundra, represented by Mr. K.K. Mehra, advocate, compromised the matter. In terms of compromise the amendments of the articles of association were submitted to the company judge, Kapur J., by B.R. Kundra and Joginder Singh. As stated earlier, Kapur J. by his order dated February 20, 1978, approved the said amendments to the articles of association and election rules. C.P. No. 32/76 was thus disposed of by Kapur J. without taking detailed evidence in the main C.P. or pronouncing on the correctness of the allegations. Although the judge had himself observed that the board of directors can be superseded if the conditions so warrant, even after the re-elections, no order was passed in relation to the supersession of the board, or debarring the dominant group of the four people in the executive committee, namely, B.N. Gupta, Joginder Singh, K.B. Mathur, Narain Dass and others. Kapur J. perhaps thought that the minority group and the majority group have settled all their disputes. The learned judge also thought that by amending the articles all complaints of mismanagement and oppression would be over. The reading of the order as a whole would convince one that Kapur J. was proceeding on the assumption that evils of groupism, dismembering the members arbitrarily, abuse of arbitration proceedings and other malpractices exist in the management of the company. These orders would show how great effort was made by Anand J. and Kapur J. to eliminate mismanagement and oppression and to avoid supersession of the board of directors.

After amending the articles and some changes in the election rules, Kapur J. ordered on February 20, 1978, that the annual general meeting for the year ending 1977 should be held before 31st May, 1978. It was accordingly fixed on May 27, 1978 On June 18, 1978, Mr. B.R. Kundra, who had now joined the ruling group and was made chairman for the annual general meeting, cancelled 18 nomination papers. The petitioners claimed that these nomination papers were of the persons opposed to the ruling group and that they were rejected on frivolous and untenable grounds. C.A. No. 223/78 was thereafter filed by one Khan, one of the directors of the company, for a ruling on the proper interpretation of some new articles without which elections would not have been free and fair. On May 19, 1978, Kapur J. cancelled the scheduled elections on 27th May, 1978, along with nominations because of the above illegalities and directed that the elections should be held by the end of July, 1978. The learned judge decided to further modify the Election Rules to "enable the elections to be held in a free and impartial manner without raising complications that have arisen over the past several years regarding these elections". The learned judge also held that the postponement of the elections shall not be treated as a default under the Companies Act, but in case the Registrar of Companies has any objection, this matter may be dealt with on a formal application later, if necessary". This order was passed on May 19, 1978. The learned company judge further extended the time for holding elections and directed that they should be held before February 15, 1979, but noting that sufficient delay had already taken place in holding the elections, the learned judge brought out some changes in the election rules.

This order was passed on December 11, 1978. As no date for the annual general meeting was announced by the company, the matter was again brought before the learned company judge on December 20, 1978. The company judge felt so frustrated with the tactics of postponement of the elections that he was required to administer the following warning to the company:

"It is regrettable that no date for the annual general meeting has been fixed in spite of the order passed on 11th December, 1978 As pointed out earlier, the annual general meeting was to be held on 27th May, 1978, and has been postponed by the order passed by myself on 19th May, 1978. This does not mean that the meeting should not take place at all and the interim arrangement should continue ad-infinitum. I am compelled, therefore, to take all the necessary arrangements about the annual general meeting on the assumption that a date will be fixed very shortly by the existing committee. In any case, the stay order will have to be discharged and if no meeting is held then the present office-bearers will face prosecution..........The annual general meeting cannot be held on or before 28th February, 1979, on which date the stay order will expire and the interim arrangement will also come to an end".

Considering the experience of the rejection of the nomination papers earlier, the learned judge directed that Mr. A.L. Joshi, advocate, would participate in the examination of the nominations and no nomination papers should be rejected without his consent. The court also indicated that Mr. C.L. Mehra, a retired deputy registrar of the court, should act as a chairman for the annual general meeting.

Another dispute which arose was regarding the irregularities committed by the company in matters of receiving authorisations for participation in the election by partnership firms who were the members of the company. When the articles of association were amended on February 20, 1978, an amendment in the election rules in regard to authorisation by partnership firms was also made by the company judge. The authorisation was to be done by the partnership firms on the forms prescribed by the company and which form should be sent to the partnership firms at least 45 days in advance of the election date. The application was held to be not maintainable by Kapur J. but held that if there was any illegality in the elections on this account it would be open for the aggrieved parties to raise it by way of challenge to elections in the appropriate proceedings.

Two appeals were filed before the Division Bench of this court-Company Appeal No. 1/79 was filed by the dominant group against the order of Kapur J. directing the elections to be held on or before February 28, 1979, and appointing Mr. A.L. Joshi, advocate, to scrutinise the nominations. Company Appeal No. 3/79 was filed by the opponents (J L. Bhasin & others) against the order of the company judge, dismissing the application in regard to the irregularities in the matter of the authorisation by partnership firms. The Division Bench made certain clarifications in the orders but maintained other directions of Kapur J. Against the order of the Division Bench passed in Company Appeal No. 3 of 1979 Mr. Khan, who was one of the applicants before Kapur J., filed a special leave petition in the Supreme Court (S.L.P. (Civil) No. 1843 of 1979). The S.L.P. was disposed of by the Supreme Court on April 9, 1979. Noting the observations of Kapur J. the Supreme Court clarified : "We make it clear that if and when the validity of the election held at the meeting of 28th February, 1979, is challenged by the appellant or any other member of the first respondent-association in an appropriate proceedings, it would be open to the court to entertain and decide the charge on any grounds available to the appellant including the grounds dealt with in these observations, as if these observations had not been made at all". The observations referred to were the observations made by the Division Bench of this court which were found to be unnecessary by the Supreme Court.

The elections were held on February 28 1979. Shri Kundra become the chairman for the annual general meeting and not Mr. C.L. Mehra as suggested by the company judge. The membership at that time was about 1,350. Half of the membership, that is, about 670, was of the partnership firms. Although the entire elections and the nominations for the annual general meeting held on 27th May, 1978, were cancelled by Kapur J., the authorisation forms for that meeting were treated by the company as valid authorisation forms. No new authorisation forms were sent to the partnership firms. The result was that out of 670 partnership firms only 170 could participate in the elections and 500 partnership firms were denied the right to participate in the elections. There were other alleged irregularities in the elections.

Number of new acts of mismanagement and oppression were continued by the dominant group as before and some new additional acts were done during the period when the managing committee appointed for the year ending 1976 was continuing for 2½ years without elections. On this background the present Company Petition No. 58/79 was filed on June 30, 1979. The petition was admitted by the company judge. Admission and denial of the documents filed took place. The petition was amended thereafter under the orders of the court. The issues are framed and the petition is now posted for hearing.

The grievances in the present petition relating to mismanagement and oppression are as follows:

(1) The same group of people consisting of Shri Joginder Singh, B.N. Gupta, M.B. Mathur, Narain Das, Dinkar Desai and others, against whom Company Petition No. 32 of 1976 was filed by Mr. B.R. Kundra is perpetuating in power. The group avoids holding elections, manipulates elections, acts in disregard of the orders of the court from time to time and indulges in acts of mismanagement and oppression. The group is in power since 1969.

(2) Shri B.R. Kundra and Shri J.S. Sood, who had moved Company Petition No. 32/76, for removal of the said dominant group from power are won over by the group and are now the parties to mismanagement and oppression. Shri Kundra, without consulting 260 members, who had filed Company Petition No. 32/76, agreed to a compromise in Company Appeal No. 26 of 1977. Shri Joginder Singh without authorisation from the company agreed to the said compromise. By practising this fraud Shri Kundra and Shri Joginder Singh avoided the enquiry in the mismanagement and oppression of the members raised in Company Petition No. 32 of 1976. They had agreed to the changes in the articles of association in their individual capacity with the said fraudulent arrangement.

(3) The changes in the articles of association and the election rules regarding authorisation of representative by the partnership firms were unauthorised and were not binding on the members of the association. The changes were made with a view to enable the dominant group to further oppress the members.

(4) Annexure 11 (Regarding authorisation by the partnership firms) is approved by the court on February 20, 1978, was also void because it seriously affected the voting rights of the members.

(5) The elections held on February 28, 1979, were illegal because they were in breach of various directions isssued by the company court on May 19, 1978, December 11, 1978, and December 20, 1978,.

(6) The said elections are illegal because voting right was denied to 500 partnership firms by not issuing fresh authorisation forms for the said election.

(7) The elections were so manipulated that out of 1,350 members, about 320 members only could attend the meeting and vote.

(8) The said elections are bad in law because the nomination papers of certain members representing joint stock companies were illegally rejected.

(9) There is misappropriation/reckless spending of about Rs. 21 lakhs by the dominant group deposited by the members with the company in trust. There are serious instances of the sub-committees oppressing the members who are opposed to the ruling clique, and of favouring the members who are with the ruling group. There is misuse of what is called D. R. Rules of the association in regard to the recovery of dues of the members. Number of instances are quoted in the petition.

(10) There is misuse of powers resulting in acts of oppression of the members in regard to registration and de-registration of pictures. Number of instances are cited. Provisions of art. 25 regarding calling of the meeting of the executive committee are misused to see that the opposition members are not able to attend the meetings.

(11) Illegal collections are made from the members and heavy penalties are imposed on the members opposing the ruling group.

(12) Provisions regarding membership and arbitration under article 68(1) are continuously misused.

(13) The members of the association are exploited and pressurised for the personal gains of the ruling group. Number of instances are quoted.

(14) The changes in the election rules made by the executive committee on May 19, 1979, were illegal and ultra vires the articles of association and the Indian Companies Act. They were made with a view to disentitle the company members and the partnership firms from contesting elections. These changes were made to supersede the rules framed by this court from time to time and as late as December 11, 1978.

(15) The attempt to postpone the elections for the year ending 1978 made by the ruling group with the Registrar of Companies was illegal. C. P. No. 30/79, filed for the same purpose collusively by Shri J. S. Sood was fraudulent.

(16) The financial year was illegally changed with retrospective effect, by the executive committee on May 29, 1979, so as to continue the unauthorised rule by the dominant group.

In the said petition under ss. 397, 398 and s. 156, the following reliefs are claimed;

(1) That the erring members of the Motion Pictures Association the erring office bearers/directors of respondent No. 1, namely, Joginder Singh, Narain Das, P.N. Gupta, M.B. Mathur, Dinkar R. Desai, respon dents Nos. 2 to 6, respectively, perpetrators of mismanagement, misappropriation and oppression be disqualified, debarred and expelled for a period of at least five years from the membership and their holding any office or membership of the executive committee of respondent No. 1.

(2) The respondent-company may be restrained in any manner from amending or tampering with the articles of association or to make rules, bye-laws or regulations of the association and more particularly in admitting temporary provisional members. The amendment of articles effected by Shri Joginder Singh and Shri B.R. Kundra in their individual capacity and as ordered by the court by its order dated February 20, 1978, may be set aside and that the articles be amended after having representations from all the members of the association. The amended election rules as circulated on May 24, 1978, may be held invalid.

(3) Free and fair elections of the respondent-company for the year ending 1978 be directed to be held under the supervision and control of this court and the illegally elected executive committee on February 28, 1979, be superseded.

(4) An interim board for managing the affairs of the company should be appointed.

(5) Effective representation should be given to minority members on the board of directors.

C.A. No. 455/79 & C.A. No. 610/79 were thereafter moved by the petitioners for supersession of the executive committee. The new allegations of oppression and mismanagement are quite serious. Supersession is also a relief claimed in the main C.P. The company judge rejected them. Company Appeals Nos. 3 and 5 of 1980, which arose out of the said petitions, were dismissed by the Division Bench on April 22, 1980. The Division Bench held that the matter raised there would be fully gone into in the main C.P. and as such no interim orders were called for. One year and a half has elapsed since then and the main C.P. is not yet heard. Both parties now want that I should not wait for the hearing of the C.P. but should pass appropriate orders immediately. By a separate order in C.A. No. 53/81, I have held that the executive committee and office bearers elected on August 30, 1980, were not legally elected.

This application with other (53/81) was heard by me in the months of March and April, 1981. Appointment of an administrator and superseding an elected body is an extreme step. It should not be normally resorted to if the elections are free and fair. Even though there are persistent allegations since 1969 regarding the manipulation of the elections by small groups of members, I refrained from passing the order as in my discretion I thought that the disposal of the main C.P. expeditiously would be a better course to follow. The experience regarding the company work, particularly in regard to Motion Pictures Association, is that the allegations of mismanagement, oppression or manipulation of elections develop a colour of staleness due to passage of time and inability of the company judge to decide the matters expeditiously due to pendency of work in this court. No C.P. can be disposed of within one year's time with all the company applications. The company court directs the elections to be held and provides also assistance with the hope that free and fair elections would be held and the problems would be resolved but the real question of an oppression by a group remains unresolved. Injustice mounts over another injustice and relations between the groups get further strained.

Faced with this difficulty during the course of the hearing and at various turns of the arguments, the question of settlement of disputes through a compromise was mooted by me. Both the parties readily agreed. My suggestion was to refer the entire pending dispute to an arbitrator with liberty to the parties to raise other agreed issues before the arbitrator. This was acceptable to both the parties. It was agreed that each party should separately meet me in chamber without lawyers. Thereafter, the lawyers would join so as to give the formal form to the formula. I passed an order to this effect in C.A. No. 53 of 1981, on April 7, 1961. During the month of April, 1981, some chamber sittings were held with the parties. They agreed upon the arbitration by a retired judge of this court. The question which remained unresolved was what arrangement to be made for the interregnum. The petitioner's group suggested that an administrator should be appointed. The group which now controls the company insisted that the management should be handed back to them. Mr. Joginder Singh represented that group. He, after consulting his advocates, Mr. K.K. Mehra and Mr. G.L. Rawal, finally confirmed that unless the management was reverted to his group the proposal of arbitration was not acceptable. I had withheld passing of any order in the three C.As., which I had heard as I was exploring the possibility of compromise.

After the failure of the compromise talks for a relatively lasting solution I proceeded with the writing of the orders. A most unmistakable fact which is apparent through the protracted rounds of litigation In re Motion Pictures Association, is that every order, interim or final, becomes a subject matter of appeals before the Division Bench or the Supreme Court. Naturaly, the hearing of the main C.P. again is pushed back. Another difficulty was of the overlapping nature of the disputed questions of fact and law in the said C.As. and the main C.P. A court should refrain from pronouncing on such disputed questions before the evidence is taken and arguments advanced in support of legal submissions in the C.P. If this is not done with discriminating mind, number of difficulties are created in the future course of litigation. This can be seen from the Division Bench judgment in Company Appeals Nos. 3 and 5 of 1980. The question whether the executive committee deliberately avoided the holding of elections for the years 1977 and 1978 or whether the meetings could not be held because of the order of the company judge dated August 30, 1979, is a question seriously raised in the main C.P. So also is the question regarding alleged misappropriation. The Division Bench rightly observed at a number of places that the said questions cannot be finally decided without leading evidence in the main C.P. However, the observations made for the limited purpose of the disposing of the C.As. by the Division Bench are utilised by the counsel for the company almost in every subsequent C.A. as if the matters were finally concluded by the Division Bench judgment in the said appeals. The Supreme Court order rejecting the S.L.P. (expressly keeping the question of the illegalities of the elections open) is also utilised for the same purpose. This tendency of the parties to overuse the previous judgment in C.As. was another reason why I decided not to pass any orders in the said C.As. During the course of hearing of these petitions, several times, I had made observations to that effect and the parties and their counsel always gave me an impression that they agreed that the course of action I was following was the only course open in the circumstances.

I finally decided not to pronounce any order in the said C.As. but to expedite the hearing of the main C.P. On May 11, 1981, I listed the matter for framing of the issues in the main C.P. on May 20, 1981. Counsel for the petitioner filed his draft issues on May 20, 1981. Mr. Mehra appearing for the company requested for further time to file the draft issues. The matter was, therefore, adjourned twice. Thereafter, the draft issues were discussed and finalized and the matter is now set for the affidavits of the parties by way of evidence.

By my decision not to pass an order in the said C.As., the petitioner should have felt aggrieved because they wanted immediate relief. The respondent-company or the members of the executive committee should not have any grievance. However, it is surprising that C.A. No. 1 of 1981, which is filed by Shri Joginder Singh, Shri Dinkar Desai and two other members of the executive committee, the grievance is made of the fact that I decided not to pass any order in C.A. No. 94/81 before the C.P. was decided. The company, which is respondent No. 4 in the said appeal, had no such grievance. I wonder whether my efforts for compromise and difficulties in passing orders in C.As. were brought to the notice of the Division Bench or not.

In the said appeal it is agreed by the parties that I should pronounce my order in C.A. No. 94 of 1981, without waiting for the decision in the C.P. because hearing of the C.P. and the decision is likely to take longer time. Even if the parties co-operate earnestly, decision in C.P. will take some time. I am of the considered opinion that an administrator should be appointed immediately to run the company.

The suit (438/81) filed by M/s. Navrang Theatres (P.) Ltd. for permanent injunction restraining the executive committee members, from acting as office bearers and restraining the executive committee from amending the rules of the association, is pending in the trial court. Mainly, the legality of elections held on August 30, 1980, are challenged. An order in the nature of interim injunction restraining the executive committee from acting as office bearers and from amending the rules of the association is in operation. The executive committee members preferred a writ petition (C.M. (M.) 223 of 1980) under art. 227 against the said ad interim injunction. This court granted stay of the said interim order while admitting the said petition. The interim order passed by this court was vacated by me on February 17, 1981, with other directions. As the trial court hurriedly passed an order suspending the interim injunction order, of its own, without following the directions given by me. I stayed that order on February 20, 1981. The result is that the original interim injunction order passed by the trial court is in full operation. That order was an interim order passed by me pending notice. The company as well as the executive committee members are taking different stands in the different petitions as to whether this order has finally disposed of C.M. (M) No. 223/80 or not. However, this is not of much consequence since CM. (M) No. 223/80, is now withdrawn by the petitioners therein on August 14, 1981. The position in law, therefore, is that the executive committee members and the company are left with no complaint against the interim injunction passed by the trial court and themselves want to contest the matter finally in the suit. Mr. K.K. Mehra, their counsel, showed such an anxiousness of the hearing of the said suit on the last date of hearing that he has moved an application for the return of the suit record to the trial court immediately. My order dated February 20, 1981, can no more be a matter of controversy either to the members of the executive committee or to the company. That order was passed only to reinforce the original order of the trial court restraining the executive committee members from acting as office bearers or for changing the rules of the association. A substantive writ petition, C M. (M) No. 223/80, against the original order of the said trial court is now withdrawn. This is another reason why I have found it fruitless to pass any order in this matter.

Some other details of these proceedings should be noted because they show activities of the members of the executive committee to delay and thwart the legal process so as to avoid the decision of the courts on the illegalities and mismanagement in the conduct of the company. M/s. Navrang Theatres (P.) Ltd., one of the petitioners in CP. No. 58/79, filed a suit No. 438 of 1980, in the Court of Senior Sub-Judge, Delhi. The suit was filed against the Motion Pictures Association and the members of the executive committee. Legality of certain election rules and election held pursuant to the said Rules in 1980 was challenged. It was also prayed that executive committee members should be restrained from working as office bearers. It was then prayed that the circular dated November 18, 1980, whereby the plaintiff was removed from the association, should be declared as null and void. In C.P. No 32 of 1976, the company judge, from time to time, had given elaborate orders for the procedure to be followed before a member is removed from the association. One grave consequence of the removal from the membership is that he is completely thrown out of business as no member of the association (under the articles of the association) can have any cinematographic contract with a non-member. An application for ad interim injunction under O. 31, rr. 1 and 2 read with s. 151, CPC, was also moved. By a detailed order the trial court passed an ad interim injunction order restraining the executive committee members from acting as office bearers and restraining the association from amending any rules. This order was passed on 5th December, 1980. The trial court fixed 16th December, 1980, for confirmation of the said order after notice to the defendants. The executive committee members, however, did not go before the trial court but filed C M. (M) No. 223/80 in this court under art. 227 of the Constitution and s. 24 (for transfer of the suit) against the said interim injunction. On 8th December, 1980, Anand J. admitted the petition and stayed the interim injunction order. The main contention raised in the said CM. was that Shri Devinder Singh, managing director of Navrang Theatres (P.) Ltd. who controls the cinema in Ghaziabad and has extensive influence there filed a frivolous suit in Ghaziabad and obtained an injunction. It was then stated that said Shri Devinder Singh who is the signatory to the present Company Petition No. 58 of 1979, under ss. 397 and 398 of the Companies Act filed a criminal case at Ghaziabad. It is then stated that both in the civil suit and in the criminal case, said Devinder Singh managed to obtain orders from the courts at Ghaziabad. It was then averred that as he was frustrated in those attempts Suit No. 438 of 1981 was filed in Delhi by suppression of facts and he managed to obtain the interim injunction. It is then averred that the grounds taken in the said suit were exactly similar to the grounds in the main C.P. and other applications moved in the company court. Some days after the admission of the said CM. by this court an application was moved by said Navrang Theatres and the company before the trial court for compromise of the suit and for withdrawal of the injunction order. It appears that there is a pattern of compromising the matters in the court. I have referred to them earlier. The most glaring example was C.P. No. 32 of 1976. Mr. Kundra who was the petitioner along with 260 others and wherein gross allegations of gross mismanagement and oppression were made.against Shri Joginder Singh and four others, was suddenly compromised in the appellate court. Similar is the case of Shri J.S. Sood, (who had filed earlier proceedings against the company and who has now joined the ruling group) moved a company petition in this court for not holding the elections. When this matter was brought to my notice I found that the proposal of compromise should be examined by the trial court by evidence. An application was made in the trial court by some of the petitioners that they should be impleaded as parties in the said suit. Since the allegations in the said suit were mainly in relation to illegality of elections of the association and had a vital bearing on the main C.P. in this court, I wanted that the trial court should examine the question of impleading the said petitioners in the main C.P. as parties in the said suit. On February 17, 1981, I passed an order vacating the original stay order passed by this court on December 8, 1980, and directed the trial court to hear the application for impleading first and then to decide the question of compromise. Another question which needed investigation was how the Navrang Pictures which was removed from the membership was suddenly readmitted to membership.

Against my order dated February 17, 1981, a special leave petition was filed in the Supreme Court on behalf of the members of the executive committee by the paid secretary. The matter was again brought to my notice on February 19, 1981, and it was pointed out that Navrang Pictures, the plaintiffs, had moved an application for withdrawal of their original application under O. 39, rr. 1 and 2. It was brought to my notice that the trial court had stayed its interim injunction order contrary to my orders. The trial court order will show that even the file of the suit was not before the court. On 20th February, 1981, I, therefore, passed an order staying the operation of the last order of the trial court by an interim order and directed the matter to be listed on February 26, 1981. Mr. Mehra, appearing for the executive committee members, promised to produce the order of the trial court before me on that date. On February 25, 1981, some members of the executive committee filed an appeal before the Division Bench of this court being Company Appeal No. 1 of 1981. The appeal was not admitted because it was against an interim order. Thereafter, I was hearing C.A. No. 94 of 1981, C.A. No. 53 of 1981 and other applications. I made efforts to have permanent solution by way of arbitration. I was quite hesitant to pass any order of supersession of the executive committee. It appears that these facts were not brought to the notice of the Division Bench and, therefore, the Division Bench admitted the appeal on 30th July, 1981. After admission of the appeal by the Division Bench the executive committee members withdrew C.M.(M) 223/80, perhaps in the hope that they will get a favourable order from the appellate court. The effect of the withdrawal of C.M.(M) 223/80 was that the executive committee members were now ready to go before the trial court, which they ought to have done eight months back but instead they kept on filing the appeals and petitions for interim orders.

The interim injunction order restraining the executive committee from functioning was not of much restraint because they performed all the functions through the paid secretary. This led to the petition for contempt before me. The executive committee never showed any anxiety to call annual general meeting for the next year. The two applications were moved before me for permitting the company to make statutory expenses and other expenses and urgent orders were sought but neither the managing committee nor the company ever sought modification of the interim injunction order so as to enable them to call the annual general meeting. On September 1, 1981, Company Appeal No. 1 of 1981 was disposed of by the Division Bench with an order permitting the executive committee to make certain expenses. The annual general meeting was due on September 30,1981, but even before the Division Bench no permission was sought for holding the annual general meeting. In C.A. No. 518 of 1981, filed on September 23, 1981, for the first time the question of calling of the annual general meeting was raised before me. Even then no particular urgency or early orders were sought by Mr. Mehra on September 24, 1981, in regard to the holding of the elections. In C.M.(M) No. 223/80, under art. 227 and s. 24 of the CPC, executive committee members had prayed that the suit in the trial court should be transferred to this court. The petitioners in the main C.P. have now filed an application being C.M.(M) No. 163 of 1981 for the same relief of the transfer of the suit to this court. Considering the experience of multiplicity of proceedings created by the parties in regard to the said suit and also considering the fact that the questions of fact and law raised in the said suit are inextricably interwoven with the questions of fact and law raised in the main C.P., appropriate orders will be passed after hearing the parties. The disposal of the suit, with all evidence, will naturally take some time. I will pass separate orders on those applications.

There is another proceeding between the parties in the nature of contempt of court. Civil Contempt Petition No. 2 of 1981 is filed against Shri Joginder Singh, the alleged Hony. secretary for the company, and Mr. J.C. Basu, a paid secretary of the company. The allegations are that in spite of the interim injunction restraining the members of the executive committee from working as office bearers of the company, the said two gentlemen are collecting moneys in cash from the members and spending them. There are other specific allegations showing that they are in fact running the company as if no injunction is in operation. Similar allegations were made by the petitioners in the substantive proceedings arising out of the interim order passed by the trial court. The said contempt petition is heard by me and the orders are reserved. The factual averments in the petition regarding various actions taken are not denied by the said contemners. The defence is that the said action could be lawfully taken by Mr. Basu and the sub-committee of the company. The action of Mr. Basu (merely a paid secretary of the company) in collecting the cash amount not depositing it in the bank and disposing of the same cannot be justified. Shri Joginder Singh has taken a stand that neither he nor any members of the executive committee had instructed Shri Basu to take the various actions complained of by the petitioners. In the interest of the company and the large number of its members this state of affairs should not be allowed to continue. An immediate arrangement for setting right the administration of the company is, therefore, necessary.

For proper and effective disposal of the main C.P. full and truthful disclosure of the material is necessary. Considering the repeated allegations that the executive committee works as an exclusive group, in a secretive manner and for personal ends there is necessity of an independent agency to assist the court for effective and quick disposal of the main C.P.

There is yet another reason why an independent authority is necessary for taking immediate control of the administration of the company. The parties are not agreeable to hold the fresh elections unless the question of the legality of earlier elections and amendment of election rules published simultaneously along with the notices for the earlier election, are decided. The Division Bench, hearing appeals Nos. 3 and 5 of 1980, has referred to the impasse created by the rival stands of the parties, in this regard. If, therefore, the Central Government or this court eventually directs that the elections should be held on certain footing, it should be at the auspices of an independent authority so as to obviate the malpractices and untoward incidents in the wake of the elections.

It is necessary to explain why the special sub-committees are also superseded along with the executive committee. The sub-committees are constituted by nomination by the members of the executive committee. The nomination of a particular group and its associates in the executive committee and sub-committees for the last decade is also noted by and commented upon by Anand J. and Kapur J. in the past. It was argued before me that the sub-committees are the real functioning bodies under the articles of association and the executive committee is a mere appellate authority, without any original functions. A bare reading of the articles of association would show that that is not the legal position but even assuming that the interpretation of the company is correct, the question is not of the legality. The powers may be legal but still they can be abused by way of mismanagement and oppression. The exercise of the power may lack good faith and the conduct of the sub-committees may result into harshness, serious detriment to a class of members and wrongful benefit to other members. These are the precise allegations in the company petitions and various applications moved before me. In the contempt petitions is demonstrated as to how the members are removed without proper procedure as laid down by Anand J. and also the arbitrary way registration of pictures is done. If the sub-committees are allowed to function, the executive committee will be able to do the mischief indirectly, which they are not allowed to do directly. Instead, it is better that the functions of these committees are performed by an independent committee of four members as stated in the order.

I have carefully gone through the efforts made by various company judges from time to time to avoid supersession of the executive committee and the sub-committees to find out a solution short of supersession and their failure. I cannot ignore their experiences and herculean efforts to reduce the dominance of a particular group, to curtail arbitrariness in the matter of removal of members, to eliminate illegalities and malpractices in the elections. I also cannot ignore the deliberate changes in the election rules, on the eve of elections so as to deprive the majority of members from exercising their voting rights. The fact that out of about 1,400 members, only about 320 members could vote in 1979 elections and only 136 members could vote in 1980 elections speak volumes for the 'democratic character' of the elected bodies of the association. The working of the company, as disclosed before the court, has left permanent impression on the company judges that a court's intervention is urgently necessary in this company because of the business of crores of rupees is controlled by company registered under s. 25 of the Act, and that the management possesses total power of denying the constitutional rights of trade and business to its members. Taking into consideration the experience of earlier company judges and my experience I find that prima facie the management of the company lacks in good faith and probity. It has a prima facie tendency and habit of being burdensome, harsh and wrongful to the members. Equity demands that the control of the company should vest in an independent authority of an administrator so as to restore the confidence of the members in the company. I am aware that this is not a permanent solution. This order is, therefore, an interim measure till the main C.P. is disposed of. In the main C.P. also there is a prayer for an interim order superseding the board. This order has become further necessary because the term of the present executive committee and the sub-committee has come to an end on September 30, 1981. The legality of the earlier election [1979] is yet to be decided in the main C.P. In C.A. No. 53 of 1981, I have held that the amendment to election rules made on August 6, 1980, depriving about two-thirds of the members of their right to contest for the posts of office bearers and executive committee, are illegal. In oppressive elections, to these offices held on August 30, 1980, based on the said amended election rules are also illegal and oppressive.

I am sure that with his maturity and vast experience, the administrator, will not be required to use all the powers conferred upon him. I hope, he will be able to create confidence amongst all sections of the associations and provide a healing touch to the strained relations between the members.

I have already expedited the hearing of the main C.P. and it is at the stage of evidence.

Company Application No. 53 of 1981:

S.B. Wad J. (Dated 12-10-1981)—This application was filed by the petitioners in the main C.P. challenging the legality of the amendments to the election rules made on May 24, 1979, and August 6, 1980. Pursuant to these amendments in the election rules, the annual general meeting elections were held on August 30, 1980; legality of these elections are also challenged in the application.

The application was heard by me alongwith C.A. No. 94 of 1981. I reserved orders in both the matters, but, ultimately, decided to postpone the orders till the main C.P. was heard. On October 1, 1981, I pronounced an order in C.A. No. 94 of 1981 and the main C.P. because both parties wanted the order to be pronounced immediately. Parties also requested that I should pass an order in this application also.

The changes brought about in the relevant election rules are as follows :

The original election rules published on 2nd June, 1975, made the following provision regarding persons who cannot contest the elections or nominate any one to contest elections to the executive committee.

"Rule 6. Who cannot nominate or be nominated.—Non-members and/or attorneys or agents/representatives of any description whatsoever of members in their such capacities are neither eligible to nominate themselves as candidates to the office of the member of the executive committee, excepting authorised representatives of company members, who are eligible to nominate and/or be nominated".

By a resolution dated May 15, 1979 (circulated to the members on May 24, 1979), the said rule was amended as follows:

"Non-members and/or attorneys or agents/representatives of any description whatever of members, in their such capacities, are neither eligible to nominate a candidate nor are eligible to be nominated themselves as candidates to the office of the member of the executive committee or to the office of any one of the nine honorary office bearers of the association".

The rule was further amended and circulated to the members of the association on August 6, 1980. This was done along with the circular prescribing the schedule for the annual general meeting/elections to be held on August 30, 1980. After the amendment the said r. 6 read as follows :

"Non-members and/or attorneys or agents/representatives of any description whatever of members, in their such capacities, are neither eligible to nominate a candidate nor are eligible to be nominated themselves as candidates to the office of the member of the executive committee or to the office of any one of the nine office bearers of the association. Partners of partnership firm, members and representatives of body corporate, even though authorised under section 187 of the Companies Act, 1956, cannot nominate or be nominated".

The combined effect of the amendments made by the executive committee was that partners of partnership firms and representatives of the companies were prevented from contesting elections to the executive committee or as office bearers of the association. The grave effect of these amendments is that about two-thirds of members of the association are prevented from contesting election and to take part in the management of the company. Such an amendment with serious consequences ought to have been placed before the general body before they were approved by the executive committee. The amendment had the effect of completely-destroying the democratic character of the management of the company. It has enabled the small group of the people with their supporters to get unanimously elected. In the elections held in 1979 and 1980 the voting figures are quite revealing. Out of about 1,400 members, about 320 voted in the elections held in 1979 and only 136 could cast their votes in the elections held in 1980.

These amendments are prima facie violative of ss. 187 and 253 of the Companies Act and the articles of association themselves. They are also oppressive to the members of the company. I am, prima facie, convinced that the present executive committee was not legally constituted, So is the case with the nine office bearers.

It may be noted that the annual general meeting held in February, 1979, was for the year ending 1977. An annual general meeting held in August, 1980, would naturally be for the year ending 1978. In the annual general meeting held on 30th August, 1980, income and expenditure account for the period January 1, 1978, to March 31, 1979, and the audited balance-sheet as on March 31, 1979, were adopted. No annual general meeting for the year ending 1979 and the year ending 1980 has been held so far. In the said meeting dated August 30, 1980, M/s. Dial & Co., Chartered Accountants, were retrospectively appointed as auditors for the period April 1, 1979, to March 31, 1980. The said annual general meeting was "adjourned" to September 30, 1980, for consideration and adoption of the accounts for the period April 1, 1979, to March 31, 1980. This is clear breach of s. 210 of the Companies Act.

The challenge to the amendment is on the grounds that they are illegal and grossly oppressive. It is alleged that the object of the amendments was to deprive about two-thirds members of the association from participating in the management of the association by depriving them the the right to contest elections. The association has a history of manipulation of elections through election rules. The details are set out in the interim order in the main C.P. in C.A. No. 94 of 1981. They should be read as a part of this order.

The association has about 1,400 members. Out of that about half the number consists of partnership firms. About 150 members are limited companies. Kapoor J. amended the articles of association in 1978. The learned judge also changed the election rules whereby it became obligatory for a partnership member to secure a prescribed authorisation form from the association so as to nominate its representative for the purposes of election. Elections were held on February 28, 1979. One of the main complaints about this election is that no authorisation forms were sent to partnership firms, their old authorisation forms were held to be invalid. The result was that out of about 650 partnership firms, only 177 could participate in the election. The learned company judge have taken serious note of this fact. Because of the objections raised by the members, the executive committee now amended the rules of the election on May 24, 1979. They were again amended on August 6, 1980, and representatives of partnership firms and bodies corporate were prohibited from nominating or be nominated for election to the executive committee or to be office bearers of the association.

Mr. K.K. Mehra, appearing for the company, argued that the questions raised in this application were already decided against the petitioners in Company Appeals Nos. 3 and 5 of 1980 and the S.L.P. filed by the peti tioners in the Supreme Court. I have gone through the judgment of the Division Bench in the said company appeals. I do not find that the Division Bench has held that the amendments dated May 24, 1979, were validly made. In fact, the Division Bench, agreeing with Mr. K.K. Mehra for the company, held that the matter should be decided in the main company petition. The judgment by the Division Bench was delivered on April 22, 1980. The major amendment regarding the prohibition of the partnership firms and the companies from participating in the elections was made on August 6, 1980. This amendment was, therefore, not before the Division Bench. The general approach of the Division Bench was that these matters should be decided in the main C.P. This was confirmed by the Supreme Court by dismissing the S.L.P. Mr. Mehra pointed out that in the additional affidavit filed by the petitioners in the Supreme Court they had referred to the said amendments to election rules. The Supreme Court decision has to be understood only in relation to the decision of the High Court and nothing more. The submission of Mr. Mehra is rejected.

The articles of association of this company do not lay down any qualifications for a person to be a member of the executive committee, that is, director. It was so because it is a company under s. 25 of the Act. Anybody can be a director. Articles 3, 4 and 7 of the articles of association entitle partnership firms and limited companies to become members. The articles of association are in the nature of a contract between its members and subject to the provisions of the Companies Act and memorandum of association constitute the working constitution of the company. There is no prohibition in the articles of association for the partnership firms and the limited companies from deputing their representatives to contest the elections to the executive committee or to be its office bearers. Indeed, there could not have been any such provision once the articles permit the firms and limited companies to be the members. That would be contrary to the fundamental principles of management recognised by the Companies Act. It would also be most undemocratic. The executive committee has, therefore, no power or competence to frame the election rules in violation of the articles of association. The amendments to election rules dated May 24, 1979, and August 6, 1980, are, therefore, ultra vires the articles of association and, therefore, void.

Amendment dated August 6, 1980, is further grossly violative of the Companies Act itself because it states that notwithstanding s. 187 of the Act, the representatives of the limited companies and partnership firms cannot nominate or be nominated to membership of the executive committee or to be office bearers of the company under s. 9 of the Companies Act has overriding effect on the memorandum and articles of association.

As stated earlier, the articles of association do not create any bar for the partnership firms and the limited companies from contesting the elections through their representatives. Section 253 of the Act lays down that no body corporate, association or firm, shall be appointed director of a company, and only an individual shall be so appointed. This section does not prohibit one of the partners of a firm or an individual representative of a limited company from becoming a director. The only requirement of the section is that a natural person can alone act as a director. Practical convenience suggests that a group of persons like partnership firms or the entire administrative difficulties in the working of the board of directors (sic).

The executive committee cannot create ejection rules to override the provisions of articles of association and s. 253 of the Act. Mr. K.K. Mehra argued that Mr. Saxena who was appointed to assist the court's observer for the elections held on February 28, 1979, had rejected the nominations of representatives of limited companies. This argument was also raised before the Division Bench deciding Company Appeals Nos. 3 and 5 of 1980. Mr. Saxena's action might provide an excuse for the company for depriving majority of its members from contesting elections. But, that cannot be cited as an "authority" on the legal position or proper interpretation of s. 253 of the Act. The company had earlier refused to give authorisation slips to about 500 partnership firms illegally. In this background, the motive in citing Mr. Saxena's opinion is quite obvious.

Section 187 of the Companies Act enables the board of directors or other governing body to authorise representatives of the limited companies to participate in the meetings of the company. The articles of association had recognised the right of the partnership firms and the limited companies to fully participate in the management of the company. Indeed, the original election rules recognised this legitimate right of the members. Mr. Mehra argued for the company that the meetings referred to in the said section are meetings of the company and not of the directors. It is difficult to agree with this interpretation. The meetings referred to are, all the meetings. The board of directors also holds meetings of a company. Other provisions are made in the Companies Act for annual general meeting and other meetings of the general body and they have a different object. The executive committee was itself aware that s. 187 permits the limited companies to have their representatives on the executive committee or to the office bearers. That is the reason why the amendment dated August 6, 1980, provides "even though authorised u/s. 187 of the Companies Act, 1956", which, of course, is illegal.

An illegal act per se does not amount to oppression for the purpose of ss. 397 and 398 of the Act but if there is a pattern and almost continuous process of illegal actions, the said illegalities themselves amount to oppression. Apart from this, to deprive the valuable right to about 2/3rds members of the association from participating in the management of the company with its earlier background is per se oppressive. The amendment dated August 6, 1980, was circulated to the members along with the circular for the annual general meeting/elections on August 30, 1980. The motive was quite clear and, indeed, the final results of elections prove it. Out of 1,400 members, only 136 members could participate in the elections. There were no nominations apart from the exact number of the executive committee members and the office bearers. Their election was, therefore, unanimous.

Articles of association with election rules were extensively amended by Kapoor J. only a year back. The alleged difficulty of s. 253 was not even mooted before Kapoor J. The executive committee did not even place the matter before the general body. An amendment intended to affect the valuable right of the majority of its members should have been done only with the approval of the general body. Each member has a vital stake in the management of the company.

The circulars dated May 24, 1979, and August 6, 1980, and the elections held on August 30, 1980, are illegal and oppressive within the meaning of ss. 397 and 398 of the Companies Act. I have already appointed an administrator as an interim measure, till the disposal of the C.P.

Company Appeal No. 23 of 1981:

The judgment of the court was delivered by

Rajindar Sachar J. (18-12-1981)—These two appeals will be disposed of by a common order because they raise the same points and facts are quite interrelated and mixed one into the other. By the said impugned orders of October 1, 1981, and October 12, 1981, the learned single judge has restrained the appellant from functioning as the executive committee of respondent No. 2 association and instead appointed an administrator of the company to take charge of the company. He has also held some amendments in election rules to be void and the election held on August 30, 1980, at which the appellants were elected, to be void.

Section 25 of the Companies Act, 1956 (hereinafter to be called as"the Act") empowers the Central Govt. if it is satisfied that an association is about to be formed as a limited company for promoting art, charity or any other useful object it may by licence direct that the association may be registered as a company with limited liability and the association may thereupon be registered accordingly and on registration shall enjoy all the privileges and (subject to the provisions of this section) be subject to all the obligations of limited companies. Sub-s. (4) of s. 25 further provides that a firm may be a member of any association or company licensed under this section, but on the dissolution of the firm, its membership of the association or company shall cease.

Respondent No. 2, the Motion Pictures Association (hereinafter to be called "the association"), is registered under s. 25 of the Act. Amongst others, the objects for which the association has been established is to promote, aid, help, encourage and develop the production, distribution and exhibition of the Indian Film or Motion Pictures Industry in all possible ways. By article 3 the membership of the association will be open to persons, firms, joint stock companies carrying on business of either film distributors or film exhibitors in the State of U.P. and in the Union territory of Delhi. Article 4(b) provides that subject to the provisions of the articles of association each member of the association shall have one vote to be exercised by a person duly authorised by the members concerned as recorded in the style of article 7 and subject to the provisions of the election rules framed by the executive committee from time to time and further subject to the provision of s. 187 of the Companies Act, 1956, in the case of the company members provided further that in the case of proprietary concern members, a sole proprietor shall have only one vote. Article 7 provides that any individual firm, joint stock company or other corporation eligible under article 3 for admission as a member may become a member in their conventional or corporate name.

Vide article 23, all the directors of the association shall be called the members of the executive committee, the number of which shall be 18 consisting of 9 honorary office bearers, and 9 ordinary members to be elected directly at every annual general meeting.

Article 24 provides that at every annual general meeting all office bearers, elected at the previous annual general meeting and the remaining 9 sitting members of the executive committee shall retire from office, the retiring office bearers and the retiring members of the executive committee shall be eligible for re-election in the annual general meeting in which they retire.

Article 28 reads as follows :

"A member who is not a retiring member of the executive committee shall be eligible for appointment to the office of a member of the committee at any general meeting if he or some other member intending to propose him has not less than fourteen days before the meeting left at the office of the association notice in writing under his hand signifying his candidature for the office of the member of the committee or the intention of such member to propose him as a candidate for that office, as the case may be".

As provided by article 4(b) election rules have been framed by the executive committee from time to time. Original election rules were framed and published on June 2, 1975. One annual general meeting was held at which the executive committee was elected. Subsequently some amendments were made, especially in rule 6 as circulated on May 24, 1979, and further on August 6, 1980. The last annual general meeting was held on August 30, 1980, at which the appellants were elected office bearers and members of the executive committee. It is these amendments to the rules and the election which has been invalidated by the impugned orders resulting in the present appeals.

The association has not had an easy sailing for the last number of years. It is enough to mention that some time in 1976, C.P. No. 32/76 was moved in which objection was taken to the various articles of the association and ultimately Kapur J., after a great deal of looking into details and with the active assistance of the parties, framed and approved the present article of the association. Though the association had held its annual general meeting for the period ending 1976 without the same having been challenged the further holding of the general meeting ran into trouble when the company judge by his order dated May 19, 1978, directed that the meeting fixed for May 27, 1978, for the financial year ending 1977 should not be held. This bar was, however, removed by the learned judge on December 20, 1978. The meeting was thereafter held on that date, i.e., February 28, 1979, and election took place. A few months thereafter the present C.P. No. 58/79 (under s. 397/398 of the Act), was filed by respondent No. 1, G.S. Mayawala, though he had himself been elected at the meeting held on February 28, 1979.

Usual kind of allegation of oppression, etc., were made. Amongst others, objection was also taken that the election held on February 28, 1979, was invalid and a prayer was made that the executive committee should be superseded. C.P. No. 58/79, is still pending disposal before the company judge. When the matter was before the learned company judge an application was made being C.A. No. 610/79, with a prayer for supersession of the committee and for appointment of an interim board to take over the management during the pendency of the C.P. No. 58/79. This application was rejected by H.L. Anand J. by his order dated November 19, 1979. Aggrieved by that, Company Appeal No. 3/80 was filed by the present respondent No. 1, G.S. Mayawala. This company appeal was dismissed by the Division Bench of this court on April 22, 1980. The Bench did not find any prima facie good reason to supersede the Board or why a new interim board should be constituted. S.L.P. was taken against the judgment of the Division Bench (in C.A. No. 3/80) being S.L.P. No. 6692/80, but the same was dismissed summarily by the Supreme Court on August 28, 1980. Thereafter, annual general meeting and elections were held on August 30, 1980.

C.P. No. 58/79 is still pending before the learned company judge. C.A. No. 94/81 was filed on February 19, 1981, praying for the immediate appointment of an administrator and restrained the committee and all the sub-committees from functioning. Company Appeal No. 23/82 is directed against this order of October 1, 1981. As the learned judge had not given the reason for passing the order dated October 1, 1981, and the same were given by him subsequently on October 12, 1981, the said order also formed part of the record of this appeal.

It appears that another application, being C.A. No. 53/81, was moved on January 22, 1981, similarly making a grievance that the election held on August 30, 1980, was held by depriving the representatives firm and the company from being elected, and that, therefore, as an interim measure the board be restrained from functioning any longer. The learned judge by his order of October 12, 1981, has found that the amendment made in rule 6 and circulated on May 24, 1979, and August 6, 1980, were illegal and, therefore, the elections held on August 30, 1980, are vitiated. He, therefore, restrained the office bearers and executive committee from functioning any further. Company Appeal No. 25/81 is directed against the said impugned order of October 12, 1981.

The position indisputably is that prior to the election held on February 28, 1979, every member, if he was an individual, was entitled to vote; he could also nominate and/or be nominated for election as an office bearer or member of the executive committee. Similarly, any one partner of a firm or managing director, director, etc., of a company authorised in writing by all the partners or by the board of directors could nominate and be nominated for the election as office bearers or as members to the committee. It may be noted that there are about 1,500 total members out of which about half are either partnership firms or bodies corporate. Rule 6 which was the original election rule published on June 2, 1975, permitted the authorised representative of the company as well as a partner authorised by all the partners as being eligible to nominate or be nominated for election to the executive committee. This rule, however, was amended on May 15, 1979, (but circulated on May 24, 1979). A further amendment was also made by the executive committee on August 6, 1980. The admitted result of the amended rule on the basis of which elections were held on August 30, 1980, was that the partners of firm and the representatives of the companies could not nominate or be nominated to either the 9 honorary office bearers of the association or to the membership of the executive committee. The learned judge has held that this rule was ultra vires the articles of association and also ss. 187 and 253 of the Act. He has also said that this amendment was motivated and amounts to an act of oppression and, therefore, has passed the impugned order appointing an administrator.

In the long detailed order of October 12, 1981, giving the reasons for ordering the appointment of an administrator on October 1, 1981, the learned judge has given the history of the various litigations concerning the association between different members and the various alleged acts of mismanagement and oppression which were alleged at various points of time in the previous years. We do not consider it necessary to repeat this exercise for the simple reason that almost all of these acts, allegations and events refer to the period earlier to moving of C.A. No. 610/1979, wherein the same prayer for supersession of the board was made. That application had been rejected and in the further appeal (C.A. No. 3/1980) also, the Division Bench saw no reason to supersede the board. This view was also approved by the Supreme Court when the S.L.P. against that order was dismissed. It seems to us and we say so with respect to the learned single judge that if on the basis of allegations and alleged acts of mismanagement and acts of oppression made in the earlier application the Division Bench did not consider it necessary to appoint any administrator as per its order of April 22, 1980 (the Supreme Court refused to give special leave), there would be no justification for relying on those again in order to appoint an administrator. This is because once the Division Bench and the Supreme Court had held that these did not show a prima facie reason for appointing an administrator, the same could not be again revived merely by filing fresh application. Such a course will bring uncertainty in the judicial system. That is why we think the reference to the earlier litigation and the allegations made in C.P. No. 32/1976, in C.A. No. 455/1979 or 610/1979, noticed by the learned single judge were inapposite and have no relevance for the decision of C.A. No. 94/81 or C.A. No. 53/81. The learned judge has in the impugned order commented that the annual general meeting held in January, 1979, was for the year 1977, and the one held in August, 1980, was for the year 1978, thereby suggesting that the committee deliberately did not hold in trial the meetings for these years and that there has also been lapse by not holding the meeting for 1979. It would appear that the learned judge has taken it that the committee was free to hold the meeting for these years but has deliberately abstained from so holding. Apart from the fact that the committee elected in August, 1980, cannot be faulted for any alleged irregularity committed by the earlier committee, the facts also do not support the conclusion of the learned single judge. The record reveals that the annual general meeting for the financial year ending 1977, was fixed for 27th May, 1978. At that time C.P. No. 32/76 was pending and the learned company judge by his order dated May 19, 1978, directed that the meeting fixed for May 27, 1978, should be cancelled. This order was passed in the presence of the respondent, G. S. Mayawala. No appeal was taken against the direction of the learned single judge cancelling the meeting which had been fixed for May 27, 1978, which would presumably suggest that the respondent had no objection to the postponement of the meeting. The meeting was apparently postponed because the learned company judge was seized in framing articles of association and it was ultimately on December 20, 1978, that the learned judge directed the holding of the annual general meeting by February 20, 1979. This meeting was held on the said date. Evidently the delay for holding the meeting could not be placed on the shoulders of the committee. Though the annual general meeting was called for September 27, 1979, yet the same could not be held because the learned company judge had on August 30, 1979, in C.P. No. 30/79, directed that pending consideration of the matter the company would not take any step to convene the annual general meeting. Thereafter C.P. No. 58/79 was filed which is still pending and the last meeting was held in August, 1980. The comment that no steps were taken to hold the meeting though an order had been passed for holding the annual general meeting overlooks the patent fact that since December, 1980, the executive committee was involved in litigations of injunctions, getting them vacated and again getting it revived and obviously in these state of affairs there was hardly any occasion for it to call the annual general meeting. It is not, therefore, correct to say that meetings has not been deliberately held by the committee apart from the fact that the committee elected on August 30, 1980, is a different committee in law from the earlier committees, and the fact that some or may be the majority of the members of the present committee elected on August 30, 1980, are the same as the earlier ones would not mean that the committee as such would suffer from any such disqualification because of any alleged action having been done by the earlier committee. We feel that the approach of the learned single judge in deciding whether to restrain the committee elected on August 30, 1980, on the alleged ground of not having earlier held annual meetings in 1978 and 1979 (which in law in any case was the duty of the earlier executive committees) was proceeding on wrong principles of law, apart from the reason that in fact this assumption is not correct.

The only new plea available was about the validity of elections held on August 30, 1980, and it is to this aspect that we now propose to refer. The fact of the amendments having been made on May 24, 1979, and August 30, 1980, are not in doubt. The reason given for making the amendments by Mr. Mehra, the counsel for the appellant, is stated to be that in the earlier elections which were held on February 28, 1979, the electoral officer who was a court official and had been appointed by the court in C.P. No. 32/1976 and C.A. No. 223/1978, to supervise the elections had objected that under the Indian Companies Act a body corporate cannot be a director of another company, and accordingly the nominations of 3 body corporate members was rejected. This plea is supported on the record. It is apparent that the occasion for amendment was provided by the observation of the electrol officer appointed by the court. Whether the committee should have acted on that advice or should not have taken a more experienced advice from some eminent counsel as urged by Mr. Parekh, the learned counsel for the respondent, is a different matter. But from the factual point it is not correct to hold (as the learned single judge has done) that there was any motive in citing Mr. Saxena the electoral officer's opinion in this regard. We must, therefore, reject that there was any ulterior motivation in making the amendments to the Rules. Mr. Mehra had emphasised that the result of the elections have not been any different whether held under pre or post-amended Rules. Mr. Mehra had also supplied to us a list of members of the executive committee who had been elected from 1973 onwards and had emphasised that even when the Rules were unamended and the bodies corporate and firms could nominate and be nominated, most of the present members of the executive committee were being elected even then. This list was seen by the counsel for the respondent and though we gave them opportunity to point out the factual errors, none has been pointed out to us. The emphasis was by pointing out that the respondents are only crying "grapes are sour" and taking cover under the amended rule and making a grievance of deprivation of right of body corporate or of partnership firms to be nominated while in fact the position is that even when this right was admittedly available to them from 1973 to 1979, the body composition of the association was not much different. We have just noticed this because it was so mentioned though the actual result of election has no relevance to the question which we are to answer—whether in law the bodies corporate or members of the firms could or should be on the executive committee ?

We may first clear the misunderstanding which seems to be spelt out from the judgment of the learned single judge wherein he has given the figures of elections held in 1979 and 1980 by pointing out that hardly 320 members voted in the elections held in 1979 and only 136 cast their votes in elections held in 1980. Though Mr. Mehra said that these figures were not on record but we may take it that they represent correctly the facts. But what was urged by Mr. Mehra strongly was that the fact that this number of members voted in the elections was not due to either the partnership firms or the bodies corporate being deprived of the right to vote. It was not disputed by Mr. Parekh that every body corporate and every partnership firm could vote if it so chose, that is to say, that none of the 1,500 or odd members of the association were disentitled under any amendment of the rule not to exercise their vote. Of course, Mr. Parekh suggested that as large number of companies and partnership firms could not nominate their representatatives for being elected to the committee they were not interested in casting a vote. That is a different matter which has relevance to the eligibility of the bodies corporate and the partnership firms to be members of the executive committee but not to voting right. We must emphasise that admittedly so far as voting rights are concerned it is still available to all 1,500 members. In the election, no one is discriminated by not being allowed to vote. We may also add that it was also not disputed that many partners of firms or directors of the company are members in their individual rights and could have contested the elections even under the amended rules. Thus, if a majority of 1,500 members do not want any of the appellants to be on the executive committee, the amended rules will not be able to save the latter. The majority will of 1,500 members to elect their representatives is in no way thwarted by the amended rules.

But the question still remains whether the amended rule should operate in future, and whether the unamended rules were so illegal that they necessarily had to be amended.

Now, the justification pleaded by Mr. Mehra for amending the election rules by the executive committee is said to be that it is in conflict with art. 28 of the articles of association, which only makes a member to be eligible for appointment as a member of the executive committee. No doubt company can be a member of the association and so can be a firm, but Mr. Mehra urges that they cannot be a member of the executive committee, i.e., on the board of directors because of the prohibition in s. 253 of the Act, which says that no body corporate or a firm shall be appointed a director of a company and only an individual shall be so appointed. The argument proceeds that as only an individual can be a member of the board of directors and as under art. 28 only a member is eligible to be appointed on the executive committee the inevitable result is that only an individual who is a member in his own right can be on the executive committee and not an authorised representative of the firm or body corporate.

Now, under the Act, a body corporate or a firm as such cannot be a member of the board of directors (i.e., clearly the mandate of s. 253). Though there is no such prohibition under the English Companies Act (vide In re Bulawayo Market and Offices Co. Ltd. [1907] 2 Ch D 458) it was still emphasised that the usual practice has been that limited companies would have directors as individuals but there is nothing in it which renders it ultra vires of the company to have another company as a sole manager or to have no director at all. But, as there is a prohibition under s. 253 of the Act, a body corporate or a firm, if it is a member of the association (sic). Mr. Mehra made an attempt to liken the requirement of art. 28 to the requirement of share qualification for a director laid down by the articles of the company. Though there is no statutory requirement, the articles can prescribe that a director will hold a specified share qualification. In such a situation if the articles provide that no person shall be "eligible" to be a director or "qualified to become" a director, unless he held so many shares, the holding of the necessary shares is a condition precedent to election, and the appointment of a person not already holding such shares will be invalid" (Gore-Browne on Companies, 42nd edition, page 681). But we must repel the contention of Mr. Mehra that art. 28 must be equated to the possession of share qualification. In our view, art. 28 only seeks to give to a member who is not a retiring member of the executive committee a right that he shall be eligible for appointment to the office of the committee in the same manner as the right has been given to the retiring member to seek re-election, vide art. 24. However, the proviso to art. 28 emphasies that in the case of such a member, who is not a retiring member, the said member has to file with the Secretary for filing it with the Registrar, his consent in writing to act as a committee member. This is the limited purpose of art. 28. We cannot accept that art. 28 as such prohibits firms or bodies corporate to nominate their authorised representatives to the executive committee. That bodies corporate or firms as such cannot be appointed directors is a separate matter from the question before us whether there is any bar on the firms or bodies corporate to duly authorise their representatives to contest the election. We do not read art. 28 as creating any such bar to giving representation to the firms and bodies corporate on the executive committee. As to how that is to be effectuated is a matter with which we shall now deal. In this connection Mr. Parekh sought to invoke s. 187 of the Act. But that is of no avail to him. Section 187 only permits a body corporate if it is a member of the company by a resolution of the board of directors to authorise such person as it thinks fit to act as its representative at any meeting of the company or at any meeting of any class of members of the company. Mr. Parekh reiterates the argument which found favour with the learned judge, who has held that the meetings referred to are all the meetings and the board of directors also hold a meeting of the company, and, therefore, s. 187 authorises the body corporate to be represented in this manner on the Board. We cannot agree. In our view, it is a misapprehension in law to call a meeting of the board of directors a meeting of the company". Company " is defined in s. 2(10) to mean a company as defined in s. 3 and s. 3(1)(i) defines a company to mean a company formed and registered under the Act or an existing company as defined in clause (ii), whereas a board of directors is defined in s. 2(6), in relation to a company, to mean the board of directors. Section 252 further provides that every company other than a public company shall have at least two directors and the directors of a company collectively are referred as the board of directors or board. Thus, a meeting of the board of directors is something totally distinct from the meeting of the company. The provision for meeting is found in Chap. I, Pt. VI, while that of the board is to be found in Pt. VI Chap. II also showing the distinctiveness". There are four types of meetings of members of a company :

(1) the statutory meeting;

(2) annual general meetings:

(3) extraordinary general meetings;

(4) separate meetings of classes of shareholders" (Palmer's Company Law, 21st edn., p. 462).

That s. 187 is only talking of representation at a meeting of the company and not at that of a board of directors is also clear from s. 187(2) which allows a person authorised to exercise the same powers (including the right to vote by proxy) which has obvious reference to s. 176 which entitles a proxy to be appointed, but only at a meeting of the company There is no question of proxy at the meeting of the Board. The purpose of s. 187 (which is equivalent to s. 139 of the English Act is obvious". A corporation, because of its nature, cannot attend a meeting; it cannot per se vote; it cannot show a hand; it cannot demand a poll; it cannot address the meeting and speak its mind. It appears to me that the leading purpose of this section is that it is designed to enable a corporation owning shares in a company to be in the same situation for the purpose of meetings of that latter company and voting at such meetings as would be the corporation if it were an individual "—Hillman v. Crystal Bowl Amusements Ltd. [1973] 1 All ER 379 at 382; [1973] 1 WLR 162. But all these are rights at the meeting of the company. Section 187, therefore, cannot automatically permit a body coporate to send its representatives to the board of directors of the association because it is not dealing with the right of representation on the Board. Now the bar of s. 253 is on the firm and a body corporate being appointed a director. There is, however, no bar in permitting their duly authorised representatives to stand for election to the executive Committee.

We have already negatived the obstacle of art. 28. As a matter of fact, art. 28 is similarly worded as s. 257 of the Act. But the applicability of s. 257 has been exempted to the association like the present which provide for elections of directors by ballot (See r. 14 of election rules), in view of the Notification of the Central Govt. No. S. O. 578, published in Gazette of India, Pt. II, s. 3(ii) on July 8, 1961. Strictly, therefore, art. 28 is superfluous apart from the fact that it creates no bar as urged by Mr. Mehra. In our view, the history of the association also shows that prior to 1979 it did not consider any bar to the representatives of firms or bodies corporate from nominating or being nominated for members of the committee. We feel that it was a correct approach. Articles provide for firms and companies being members. It would be natural to expect that all members should enjoy not only the right to vote but also to stand for elections to the membership of the executive committee. It was obviously in pursuance of this laudable object that the unamended rules provided for individuals firms and company members (of course, subject to being duly authorised as per election rules) to stand for elections to the executive committee. Rules 1, 3, 6 as to who can nominate, who can be nominated and who Cannot be nominated provided for just rights of all these three categories of members. That situation would have continued but for the doubt cast on the legality of these rules by the objection raised by the court observer when the election took place on February 28, 1979. We are prepared to accept that it was because of this objection that amendments were made bona Me on May 24, 1979, and August 6, 1980, and though the amendments cannot be said to have been motivated by any extraneous considerations, still it is our view that it would be just and in the interest of the association and the members that a large number of members like the bodies corporates and the firms should not be denied the right through their duly authorised representative as per election rules to nominate or be nominated for election as office bearers or as members of the executive committee of the association. To that extent, therefore, we feel that the amendments made on May 24, 1979, and August 6, 1980, though they may not be illegal in the sense that they do not contravene the provisions of the Act or the articles of association, yet we feel that in the exercise of our equity jurisdiction and in the interest of the association the position qua the rights of body corporates and firms should be restored to what was in the election rules prior to the amendments made and circulated on May 24, 1979, and August 6, 1980, and we order accordingly. We are less diffident in so ordering because we have found no material to show that prior to May, 1979, when the old election rules permitted firms and company members to stand for elections through their duly authorised representatives, it caused any inconvenience or complexity or hurdle in the actual working of the association or was harmful to the interest of either the members or the association because it is well settled that a company whether limited by shares or guarantee is a legal entity whose power was to be exercised for the benefit of that entity and those exercising the powers were bound not merely by their duties towards the other members but also by their duty towards the company-, vide Gaimanx. National Association for Mental Health [1971] Ch D 317. In our opinion, though the objection of the electoral officer at the time of the 1979 elections that (sic) as such cannot be a member of the board was correct in the limited sense, it did not automatically need any amendments to be made to the old election rules. But we also cannot say that because of the objections amendments were needed, was not a view which could not be bona fide held by the executive committee. They cannot, therefore, be faulted or found blameworthy for having made these amendments. It is a different matter that we are directing in the exercise of our equitable jurisdiction that the position be restored as under the old election rules. It is true that it is for the shareholder and not the court to determine whether or not the alteration is for the benefit of the company, and that the court will not lightly make any alteration, yet it also cannot be disputed that the power of the court when dealing with an application under s. 397/ 398 read with s. 402 empowers it to provide for any matter for which in the opinion of the court it is just and equitable that the provision should be made. Though the powers of the court is very wide it will normally not exercise it unless it feels it is not only just and equitable but is also in the interest of the company. It is in recognition of this that we feel that art. 28 which possibly is capable of being read as was read in the report of the electoral officer when election was held on February 28, 1979, as barring the duly authorised representatives of the body corporate or the firms to be members of the committee that we should make slight alteration. This we are doing more for Clarification though, in our view, even without this it would have served the purpose of permitting the bodies corporate and firm members to participate in elections to the executive committee. We would direct that an explanation be added to article 28 as follows:

Explanation—A member for the purpose of election only to the office bearers or for members of the executive committee will mean all those who by election rules can be nominated for the said elections.

Elections were last held on August 30, 1980. They cannot be held to be illegal because they were held on the basis of the existing election rules. We have not found these amendments illegal, are only directing future elections on the basis of old election rules because of larger consideration and in the interest of harmony amongst members. We are doing this in the hope that election will dissolve many controversies of old. The persons who will be able to contest elections will be as mentioned above. The learned judge in appointing the administrator was also influenced by the fact that in any case the term of the present committee had come to an end on September 30, 1981, This is not correct because art. 31 provides that the retiring member or members of the executive committee shall retain office till the dissolution of the meeting at which his or their successor is/are elected. Thus, until the annual general meeting is held and elections are held, the existing executive committee continues. This consideration which weighed with the learned judge that the present members.have ceased to have any right to continue is thus based on misapprehension of the legal position. That is another reason why the impugned order appointing the administration cannot be upheld.

We wish to make it clear that the procedure that will be followed for the elections to be held for which we are giving directions should be one which is laid down in the amended rules of August 6, 1980, from r. 7 onwards excepting that the procedure and eligibility of members to nominate and be nominated will not be as laid down in the amended rules 1 to 6 of August 6, 1980, but will be rr. 1 to 6 as they existed prior to amendment in May, 1979. This direction will permit the individuals, firms and company members not only to vote but also to exercise the right of nominating or being nominated as laid down in rr. 1 to 6 of election rules before the amendment made in May, 1979, or August, 1980. Eligibility to nominate or being nominated will be determined by the election rules, as they stood before being amended in May, 1979, or August, 1980. We have said this because rr. 1 to 6 give substantive right to a person who can nominate and be nominated and that is what the real controversy is about and the rest of the procedure as to the conduct and the manner of holding election and the procedural aspect of which no controversy is raised. We may also mention that the person who can nominate and be nominated has been prescribed in the original election rules and it is apparent that the forms prescribed therein will have to be used. The same, of course, will be provided to all the members by the association who wish to participate in the election. It may be mentioned that Mr. Parekh strongly urged that if we were to direct the holding of an election we should supersede the present committee and appoint an administrator to carry on the functions of the board in the meanwhile. We are not inclined to do so. We have already, while staying the operation of the order of the learned single judge, appointed Mr. S.N. Shankar, a retired judge of this court, as chairman of the committee. We have given certain directions therein which we feel would sufficiently safeguard the rights of all the members including the respondents so as to see that no unfair steps are taken against the interest of any member or the company. We must, therefore, overrule this plea of the respondents.

In the result we order as follows :

1 that the order of the learned single judge appointing the administrator is set aside,

2 that in place of that order our order passed on October 6, 1981, as affirmed on October 21, 1980, by which we had appointed Mr. Shankar as chairman of the board of clirectors and the directions given therein will be substituted for the order of the learned single judge,

3 that the elections to the executive committee will be held and completed by March 31, 1982; and

4 that in order to carry on the above directions the executive committee is directed under the chairmanship of Mr. Shankar to take necessary and consequential steps so as to effectuate the directions given herein.

In this connection we may note that under art. 30(d) the executive committee is to appoint a chairman who shall not be interested in the election either directly or indirectly. We have already directed while appointing Mr. Shankar as chairman that if any decision is taken by the executive committee and if not agreed to by the Chairman, the same will not be implemented by the chairman within one week. That direction will continue in the matters other than the election matters; but with regard to the election matters we direct that no decision of the executive committee will be implemented unless it is agreed to by Mr. Shankar, chairman of the executive committee. We are doing this not because we have any reason to feel that the other members of the executive committee will not bring to bear on the matter consideration of impartiality and fairness which is expected of them. On the contrary we have every hope that their action will be fair and impartial. But in order to remove any kind of misunderstanding, however unjustified as the parties are having litigation for long time, it seems to us that the benefit of the final views of the chairman like Mr. Shankar should prevail in the matter of elections which is to constitute the executive committee for the next year. As a matter of fact Mr. Mehra had fairly offered at the earliest stage that the appellant had no objection if the elections were held under the guidance of any independent authority and it is on the basis of that assurance so readily and gracefully and correctly given that we are giving the finality to the decision of Mr. Shankar in the matter of elections only. With regard to other matters the earlier order will continue. We are confident that once the elections had been held the immediate controversy and the tension should hopefully dissolve. But that is in the lap of future and seeing the fiercest controversy disclosed during the hearing we can only hope that the steps indicated will lead to a lessening of the tension and the association will be able to function in a cooler and calmer atmosphere, and devote itself more to the objects for which it has been formed.

At the time of passing the order on October 6, 1981, we had directed that Mr. Shankar will be paid Rs. 1,000 for every meeting of the executive committee that he attends. As we by our order are requesting Mr. Shankar to take on also the load of elections it will be natural for him not only to attend the meetings of the executive but also having to go to the office in connection with the election work or attending some other sub-committee meetings. We feel that it will be proper if instead of the earlier directions of payment of Rs. 1,000 for every meeting we should substitute it by order of payment of consolidated sum. We, therefore, order that Mr. Shankar will now be paid Rs. 5,000 per mensem as honorarium with effect from January 1, 1982. However, up to December 31, 1981, the previous order of payment of Rs. 1,000 for every executive meeting which he has attended or may attend will stand. Mr. Shankar will continue as chairman till the new chairman is elected in pursuance of elections ordered by us.

If for any reason the elections are not completed by March 31, 1982, the matter will be listed before the court for further directions on April 5, 1982.

We may mention that Suit No. 438/80 was filed by M/s. Navrung Theatres (Pvt.) Ltd. for permanent injunction restraining the executive committee and other office bearers from functioning as such. Mainly the legality of elections held on August 30, 1980, is challenged in that suit. Originally an interim injunction was issued by the trial court on December 5, 1980, restraining the members of the executive committee from functioning. This order, however, was stayed by this court in CM(M) No. 223/80 on December 8, 1980. Subsequently, a number of orders were passed and ultimately the order was passed by the learned company judge on February 20, 1981, the result of which was that the interim injunction passed by the trial court became inoperative. Appeal No. 1 of 1981 was filed in this court and it was during the pendency of that that C.A. No. 94/81 and C.A. No. 53/81 were disposed of by the learned single judge. The learned single judge has observed that as he had appointed an administrator and the executive committee cannot function it is unnecessary to pass any order in the matter of interim stay order passed by him on February 20, 1981. As we have dealt with the matter and as we have also directed fresh election, Suit No. 438/80, which was filed to restrain the present committee from functioning, has obviously become infructuous. We wish to make it clear that any injunction given therein or the revival of that injunction because of the interim stay passed by the learned single judge on February 20, 1981, will not mean revival of injunction because the same has lost all purpose in view of the decision given by the learned single judge and now by us on appeal. We are so clarifying, lest the parties to Suit No. 438/80 should seek to contend that the power to issue an injunction to restrain the executive committee or from holding fresh elections is still open for argument and seek to stall our order. As we have directed elections to be held obviously, the trial court cannot now pass any order seeking to injunct the holding of the said elections and all interim orders passed in Suit No. 438/ 80 seeking to restrain the committee are hereby vacated.

In the result, the appeal is disposed of as above. The parties are left to bear their own costs throughout.

[1959] 29 COMP. CAS. 552 (PAT.)

HIGH COURT OF PATNA

Nand Prasad

V.

Arjun Prasad

AHMAD AND DAYAL, JJ.

LETTERS PATENTS APPEAL NOS. 13 AND 14 OF 1957

MAY 16, 1958.

K. AHMAD, J. - Both these appeals arise out of the same proceeding taken on June 22, 1952, under section 153 of the Indian Companies Act, 1913, by Sri Arjun Prasad, respondent No. 1, for the reconstruction of the Gaya Sugar Mills Ltd., hereafter to be referred to as "the Mills Ltd." which had already been directed to be wound up under an earlier order of this court passed on November 14, 1951, and are directed against the common order, dated September 24, 1957. Letters Patent Appeal No. 14 of 1957 is on behalf of about seventy preference shareholders out of about one hundred and eighty and has been argued on their behalf by Mr. S. N. Dutt. The other appeal, Letters Patent Appeal No. 13 of 1957, is on behalf of about twenty-five employees of the corporation who are represented before us by Mr. Sankat Haran Singh.

The aforesaid application for reconstruction, which was exclusively on behalf of Sri Arjun Prasad, respondent No. 1, had been admitted on October 6, 1953, along with the following directions :

"The petitioner is directed to arrange for holding separate meetings (a) of the debenture holders and of the other secured creditors of the company, (b) of the unsecured creditors of the company, (c) of the preference shareholders of the company and (d) of the ordinary shareholders of the company on November 9, 1953, at 10 a.m. and 4 p.m. and on November 10, 1953, at 10 a.m. and 4 p.m. The meetings of item (a) will be held at 10 a.m., on November 9, 1953, of item (b) at 4 p.m. on the same date, of item (c) at 10 a.m. on the 10th November, 1953, and of item (d) at 4 p.m. on the same date.

Mr. S. N. Dutt, barrister-at-law, if he does not consent, Mr. G. C. Banerji, an advocate of this court, is appointed to act as chairman of the meetings with power to adjourn the same ....

The chairman is directed to report the result of the meetings to the court on or before November 17, 1953."

Perhaps Mr. Dutt did not accept the chairmanship. So the first two meetings fixed for November 9, 1953, namely, those of the debenture holders and the other secured creditors and of the unsecured creditors as also the third meeting, namely, that of the preference shareholders fixed for November 10, 1953, were held under the chairmanship of Mr. G. C. Banerji. Unfortunately the fourth meeting, namely, that of the ordinary shareholders, could not be held on the date fixed and that was ultimately held some time in between June 26, 1955, and June 28, 1955.

Thereafter came the proposal for certain modification in the original scheme. But as the modification concerned only the shareholders and the preference shareholders their meetings were held again on March 4, 1956. In the meantime Mr. G. C. Banerji, due to the uncertainty about the fourth meeting as directed by the court, had already submitted his reports on November 16, 1953, of the three which had already been held under his chairmanship on the 9th and 10th November, 1953, including the one of the unsecured creditors and it is the report of this latter meeting held on November 9, 1953, which is the subject-matter of the controversy in these appeals.

It appears that the learned company Judge on the submission of those reports by Mr. G. C. Banerji had directed that they would be taken for consideration along with the main application for reconstruction. Accordingly, these reports as to the various meetings ultimately came up for consideration by the court for the first time on July 22, 1957. On that day in the course of the hearing a number of objections were raised against two of these reports, namely, the one relating to the meeting of the shareholders and preference shareholders held on March 4, 1956, and the other relating to the meeting of the unsecured creditors held on November 9, 1953.

The report as to the latter meeting was that four creditors representing a total value of Rs. 1,38,173-3-8 1/2 pies had objected to the resolution and others representing in all a total value of Rs. 6,97,790-6-9 had voted in favour of the scheme. In the group of the latter the value of Bhadani Brothers was Rs. 3,41,862-4-0 and that of Hindustan Coal Co. was Rs. 10,258-0-3 both of whom in that meeting had been represented by respondent No. 1, Sri Arjun Prasad in person. The claim of Sri Arjun Prasad is that the directors of these two companies had by their respective resolutions authorised respondent No. 1 to vote on their behalf in person. Accordingly he acted as such on their behalf and voted for them in person and not by proxy.

Now the objections, which are the subject-matter of these appeals, against this report of Mr. G. C. Banerji are three-fold. The first is that the chairman wrongly allowed Sri Arjun Prasad to represent the aforesaid two companies in person. The second objection is that Sri J. N. Mustafi was wrongly allowed by the chairman to represent Bihar Sugar Mills Association, who were creditors to the extent of Rs. 2,833-12-0 and the Indian Sugar Mills Association, who were creditors to the extent of Rs. 956 on the basis of proxies executed in his favour inasmuch as the same had not been done in conformity with rule 147 of the Patna High Court Rules. The third objection is relating to Sri N. N. Sahay and it is said that he too was wrongly allowed to represent the Standard Vacuum Oil Co., as in his case also the proxy submitted was not in order.

All these three objections have been decided against the appellants by the learned company Judge. Here, however, at the time of argument the last two objections have not been pressed either by Mr. S. N. Dutt or by Mr. Sankat Haran Singh. So the appeals are now confined to the first objection only, which, as already stated, is based on the ground that the aforesaid two companies Bhadani Brother and Hindustan Coal Co. should not have been allowed to be represented in person by respondent No. 1, Sri Arjun Prasad; and in support of this objection two-fold contentions have been advanced. The first part of the contention in the words of the learned company Judge is as follows :

"The most serious objection which Mr. Dutt has taken is that the chairman wrongly allowed Arjun Prasad to represent these companies. He has pointed out that section 80 of the Indian Companies Act, 1913, provides for a company which is a member of another company and not for a company which is a creditor of another company to authorise any person to act as its representative at a meeting of that other company. He has submitted that the law has been modified in this respect by the Companies Act, 1956, because section 187 of that Act empowers not only a member company but also a creditor company to authorise any person to act as its representative at a meeting of the company, of which it is a member or creditor. He has contended that the only method by which a company which is a creditor of another company can be represented at a meeting of that company in cases like the present case where the Act of 1913 applies is as provided in rule 150 of the Patna High Court Rules, so far as cases within the jurisdiction of this court are concerned."

While the other part of the contention, as stated in the order under appeal, is that :

"The resolutions of the two companies which were produced by Sri Arjun Prasad, should have contained copies of the signatures of the chairman of those meetings in view of sub-sections (2) and (3) of section 83 of the Act of 1913."

Mr. Choudhary appearing for respondent No. 1 has strongly persuaded us to hold that there is no substance in either of these two-fold contentions. His submission is that the personal representations of Bhadani Brothers and Hindustan Coal Co. by respondent No. 1 were regular and valid in law. The main argument advanced by the learned counsel in support of the order under appeal is based on two grounds.

The first ground is that objections raised by the appellants are too belated and as such not now entertainable in law. The second ground is that rule 150 of the Patna High Court Rules is not at all applicable to a proceeding under reconstruction inasmuch as that rule as also others framed by this court under the Companies Act is exclusively meant for a proceeding in liquidation. In other words, the way in which a creditor corporation may vote at a meeting of the creditors held in the course of a reconstruction proceeding of a debtors' company is not controlled by rule 150 of the Patna High Court Rules.

What Mr. Chaudhary contends is that the provision of law, as laid down in section 153 of the Indian Companies Act, 1913, for the purpose of meetings held in the course of a reconstruction proceeding, is an exhaustive code and as within the terms of that section the power given to the creditors to appear in person or by proxy is not subject to any qualification or limitation, there is no reason why in this respect any distinction or discrimination should be made between a creditor who is a natural person and one who is not so. That means the rule of law, as provided in section 153 of the Indian Companies Act, 1913, for a creditor to vote in person or by proxy is to be construed independent of any limitation that is to be found in the case of the provisions made in this regard under section 80 of the Indian Companies Act, 1913. It is true, he submits, that that section while making provision for a corporation to vote in person speaks about a member corporation only and not in relation to a creditor corporation; that means, the right given thereunder is confined to a member corporation alone. But that cannot be a ground for placing a similar restriction on what is provided in section 153 of the Indian Companies Act, 1913. That, according to learned counsel, is as to matters provided therein an exhaustive code. The learned company Judge has accepted both these contentions advanced by Mr. Choudhary and has accordingly held that the aforesaid two companies were rightly represented in person by respondent No. 1.

The finding given on the first point, namely, that of delay is in these words :

"I agree that, in addition to the likelihood of prejudice being caused to parties, proceedings are also likely to become unduly prolonged, if objections are allowed to be raised at any stage even at the time of argument. I do not, therefore, think that the objections of Mr. Dutt about the unsecured creditors' meeting should be entertained."

This finding, according to Mr. Dutt, may be said to be correct so far as it relates to an objection which is based purely on facts. But it cannot be said to be correct when the objection raised is one which is founded purely on law or what is apparent on the very face of the order without any further investigation into facts. In other words, in a case where all the necessary facts for and against an objection are already on the record, there can be no question of prejudice or delay in the disposal of the proceeding if the same is raised even at the final hearing.

I think there is sufficient force in this contention. After all, it is the duty of the court to see that the report submitted by the chairman of the meeting and the decision arrived at therein is one that is not on the very face of it hit by any rule of law as laid down in section 153(2) of the Indian Companies Act, 1913, or is otherwise contrary to any equitable consideration of the matter. Therefore, if the court finds or the attention of the court is drawn to the fact that the report as submitted by the chairman about the approval of the compromise or arrangement in the meeting is on the very face of it contrary to law as laid down in section 153(2) of the Companies Act, 1913, the court has no option but to look into it and not to give any sanction to it unless that is disposed of. In other words, the sanction of the court, which is a sine qua non for the compromise or arrangement being binding on all the parties concerned, is dependent on the fact that at least on the very face of it the report does not suffer from any non-compliance of the rule of law as laid down in section 153 of the Companies Act, 1913. On the question of sanction, Halsbury's Laws of England (Hailsham Edition) in article 1354 of Volume V at page 794, while dealing with this subject, says :

"The court must be satisfied that the statutory provisions have been complied with, that the classes of creditors or members have been fairly represented by those who attended and that the statutory majority approving the scheme is acting bona fide in the interest of the class it professes to represent. The arrangement must also be such as a man of business would reasonably approve, and fair and reasonable as regards the different classes, if any."

Similar point came to be considered in In re Alabama, New Orleans, Texas and Pacific Junction Railway Co., where LINDLEY L.J. observed :

"We have here to deal with companies registered under the Acts of 1862 and 1867, to which I have alluded, and all that Parliament has thought it necessary to require is, that there shall be a meetings of the creditors, to be summoned in such a manner as the court shall direct, and that there shall be a majority in number representing three-fourths in value of such creditors present, either in person or by proxy at such meeting. Now, in 1870, I do not think that debentures payable to bearer, and share warrants payable to bearer, were anything like so common as they are now. They were tolerably common, but not so common as they are now; and it is quite usual that where, as here, you have a huge debenture debt represented by debentures payable to bearer you may have a comparatively small meeting answering the notices and summons convening it, because it is very difficult to give notice to persons who hold debentures payable to bearer. It is said that people do not look in the newspaper to see if there are any advertisements with reference to the companies in which they are interested, and there must be a multitude of persons who have seen these advertisements at all. I think that is very likely, but, still, there is the statute, and what the court has to do is to see, first of all, that the provision of that statute have been complied with; and secondly, that the majority has been acting bona fide. The court also has to see that the minority is not being overridden by a majority having interest of its own clashing with those of the minority whom they seek to coerce. Further than that, the court has to look at the scheme and see whether it is one as to which persons acting honestly, and viewing the scheme laid before him in the interests of those whom they represent, take a view which can be reasonably taken by businessmen. The court must look at the scheme, and see whether the Act has been complied with, whether the majority are acting bona fide, and whether they are coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and then see whether the scheme is a reasonable one or whether there is any reasonable objection to it, or such an objection to it as that any reasonable man might say that he could not approve of it."

Likewise in the case of In re English, Scottish, and Australian Chartered Bank LOPES L.J. observed :

"Now, the mode in which this power is to be exercised has, to my mind, been very well and correctly laid down in the Alabama, & Co. Railway Company's case, which has already been referred to. What I understand to be decided by that case is this, that it is not sufficient for the court to ascertain that the statutory conditions have been complied with; the court must go further than that, and be satisfied that the statutable majority which are to bind the dissentient minority have acted bona fide, that they have not acted adversely to those whom they professed to represent, and, lastly, that the arrangement contemplated is a reasonable arrangement, such as that which a man of business would reasonably approve. With regard to the word 'reasonably' it must always be borne in mind, the word 'reasonably' is a relative term : it means reasonably with regard to the particular circumstances of the case. What is reasonable in one case might be unreasonable in another. The reasonableness must be always regarded with reference to other alternatives. For instance, an arrangement giving a very small benefit to creditors, if the alternative were absolute ruin to the company and no benefit to the creditors, would I think be reasonable."

Again in In re Dorman, Long & Co., In re South Durham Steel and Iron Co. MAUGHAM J., while dealing with the very subject, stated :

"I will first state my view as to the function of the court in determining whether the compromise or arrangement should be sanctioned by the court. It is plain that the duties of the court are two-fold. The first is to see that the resolutions are passed by the statutory majority in value and number, in accordance with section 153, sub-section (2), at a meeting or meetings duly convened and held. Upon that depends the jurisdiction of the court to confirm the scheme. The other duty is in the nature of a discretionary power, and it has been the subject of two decisions in the Court of Appeal, the first being the case of In re Alabama, New Orleans, Texas and Pacific Junction Railway Co., and the second case of In re English, Scottish, and Australian Chartered Bank ... 'The court must look at the scheme, and see ... whether the scheme is a reasonable one or whether there is any reasonable objection to it, or such an objection to it as that any reasonable man might say that he could not approve of it.' I think that those phrases, which were contained in a judgment which had not been reserved, do not represent exactly what the Lord Justice intended. I prefer as representing the view of the Court of Appeal, the language in the statement of BOWEN L.J., that 'a reasonable compromise must be a compromise which can, by reasonable people conversant with the subject, be regarded as beneficial to those on both sides who are making it' and he added, to explain that, '... I have no doubt at all that it would be improper for the court to allow an arrangement to be forced on any class of creditors, if the arrangement cannot reasonably be supposed by sensible business people to be for the benefit of that class as such ...' FRY L.J. said '... the court ... must be satisfied that the proposal was at least so far fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such a member, might approve of it.' In re English, Scottish, and Australian Chartered Bank, LINDLEY L.J. does not seem to have had his attention drawn to the fact that what he had said in In re Alabama, New Orleans, Texas and Pacific Junction Railway Co., was not quite the same as what BOWEN L.J. and FRY L.J. had said, but he plainly approved of what BOWEN L.J. and FRY L.J. had said, for he so stated, and he quoted what FRY L.J. had said : He also said this (In re English, Scottish, and Australian Chartered Bank) : 'If the creditors are acting on sufficient information, and with time to consider what they are about, and are acting honestly, they are, I apprehend, much better judges of what is to their commercial advantage than the court can be ... While, therefore, I protest that we are not to register their decisions, but to see that they have been properly convened and have been properly consulted, and have considered the matter from a proper point of view ... the court ought to be slow to differ from them.'

In my opinion, then, so far as this second duty is concerned, what I have to see is whether the proposal is such that an intelligent and honest man, a member of the class concerned acting in respect of his interest, might reasonably approve."

Then came the observation made in Bengal Bank Ltd. v. Suresh Chakravarthy, which reads :

"The scheme, of course, is not effective unless it is confirmed by the court. But before the court makes an order sanctioning the scheme, it is necessary in the first place to have the scheme or arrangement approved and accepted by the requisite majority and if the scheme is sanctioned by the requisite majority then it is presented to the court for confirmation. In other words, the court cannot sanction a scheme until it has been approved by the majority in terms of section 153(2) of the Indian Companies Act."

Therefore, these authorities firmly establish that one of the essential conditions to give jurisdiction to the court to accord its sanction to a scheme is that it should have been passed by a majority as required under section 153(2) of the Companies Act, 1913, and that the proxies filed at the meeting were valid in law. In other words, unless the court is satisfied that the same has been approved by the statutory majority and in a manner provided by law, it is not open to the court to give any sanction to it.

That being so, in case where, as here, a question is raised as to whether a scheme of reconstruction under consideration has been approved by the statutory majority or not, the court cannot refuse to consider the same if on facts already on the record it is clear that it has not been so done though the position may very, and that for good reasons, where such an objection is not available on the very face of the report without some further investigation into facts.

In those cases no doubt the question, like that of prejudice, laches and unnecessary protraction of the proceedings may arise for consideration before an objection to the validity of the report is allowed to be raised for the first time in the course of the final hearing of the matter. If that is so then here the objection as to the absence of signature on the copy of the resolutions, which respondent No. 1 had produced in proof of his authority before the chairman of the meeting held on November 9, 1953, has to be held as rather belated; for it is not denied that no such objection had ever been raised before Mr. G. C. Banerji nor was it ever mooted in any manner by the appellants before the learned company Judge until the hearing of the report had already been taken up.

Therefore, on that technical ground alone this part of the argument has to fail. Further, I think that the right of a person to vote as the representative of a company under such circumstances depends essentially on the question whether he has been validly appointed or not and not upon evidence produced by him in support of that authority. And so far as the evidence is concerned, it is meant only to satisfy the chairman that he is the person duly authorised so that he may be in a position to admit the vote cast by such a representative which is generally done by the simple production of the copy of the authorised resolution : In re Kelantan Coconut Estates Ltd.

Then on merits also I think there is no substance in this objection. It is quite understandable that in the meetings wherein those resolutions were passed, the chairman must have put the signature on the minutes not after each resolution but only once at the end of it, as is the common practice in matters like these. Perhaps it is for that reason that section 83(2) of the Indian Companies Act, 1913, speaks of signature only in a case where the entire minute is involved and not in relation to a case where only a part of it is to be produced.

Therefore, in the absence of any evidence that there was no other resolution passed in that meeting, it is difficult to say that the chairman presiding over them had not put the signature on the proceedings of that day. That being so, the absence of signature can be very easily explained on the footing that the copy which was produced was not of the entire proceedings but only of a particular resolution.

Lastly, if in fact the matter was not so, then I think it was the duty of the appellants, as already stated above, to draw the attention of the chairman of the meeting then and there so that the matter could be thrashed out at the spot before any action was taken on it or at least at any time before the hearing had begun for in that case also it was still possible for the respondents to meet that objection either by affidavit or other evidence.

Unfortunately, the appellants did not take the trouble of agitating the matter at any of these stages. Therefore, it has to beheld that the objection on the ground of absence of signature on the copy of the resolution produced by respondent No. 1 in support of his authority is too belated and cannot be now taken into consideration when raised for the first time at the final hearing of the matter.

The same, however, I think cannot be said about the other objection which relates to the invalidity of the representation of the aforesaid two companies in person through respondent No. 1. The decision on that point, as placed before us, depends exclusively on the interpretation of law and not on any fact which is not already on the record of the case. Therefore, though it is true that in regard to this objection also the position is the same, namely, that it was never raised either before the chairman Mr. G. C. Banerji in the meeting held on 9th November, 1953, or at any stage until the application under section 153 of the Indian Companies Act, 1913, had been taken up for final hearing, yet in view of the fact that it is founded purely on the interpretation of law, it can not be thrown out on the simple ground of delay, for delay in such a case is not likely to take others by surprise or to place them in any disadvantageous position.

The exact objection raised by Mr. Dutt appearing for the appellants in this connection is that the chairman should not have at the meeting of the unsecured creditors held on 9th November, 1953, allowed Sri Arjun Prasad to represent in person the said two companies, Bhadani Brothers and Hindustan Coal Co., and in the absence of any proxy having been filed on their behalf, their votes should not have been counted in calculating the requisite statutory majority for the approval of the scheme. This raises a question as to the mode in which a creditor corporation can exercise votes in a general meeting of the creditors held in the course of a proceeding under section 153 of the Indian Companies Act, 1913.

Now under common law, votes at all meetings are taken by show of hands, and it is only when a poll is taken that regard is to be had to voting power according to number of shares. That means, unless a poll is demanded, the voting is to be done by numerical majority and it is this which we find laid down in article 62 of Table A of the English Companies Act, 1948, and in regulation 60 of Table A of the Indian companies Act, 1913. Then the other principle which also is well established is that the proxy shall not be entitled to vote except on a poll unless the articles otherwise provide. This is the English Companies Act, 1908, as enacted in section 136, while in the Indian Companies Act, 1913, in section 79. And so far as the articles of association of the company, namely, Gaya Sugar Mills Ltd., are concerned, they speak about it in article 78 which reads :

"No member not personally present shall be entitled to vote on a show of hands, unless such member is a company present by a representative duly authorised under section 80 of the Indian Companies Act, 1913, in which case such representative may vote on the show of hands as if he were a member of the company."

The third relevant rule in this connection is that on a poll votes may be given either in person or by proxy. This is the English Companies Act, 1948, as laid down in article 67 of Table A while under the Indian Companies Act, 1913, in regulation 64 of Table A, and it is the implication of this regulation that is mainly the subject of controversy in this case; for it is not denied that, though in terms regulation 64 is applicable to a going concern alone, in substance the rule in this regard that votes may be given either in person or by proxy is the same, whether it be a case of a going concern or a concern that is in the process of reconstruction under section 153 of the Indian Companies Act, 1913, or one which is in the course of winding up. The rule of reconstruction, as laid down under section 153(2) of the Indian Companies Act, 1913, says :

"If a majority in number representing three-fourths in value of the creditors or class of creditors, or members or class of members, as the case may be, present either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditors or the class of creditors, or on all the members or class of the members, as the case may be, and also on the company, or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company".

while the one relating to winding up as laid down in rule 144 framed by this court in exercise of the powers given under section 246 of the Indian Companies Act, 1913, provides : "A creditor or contributory may vote either in person or by proxy", which substantially is the same as the opening part of rule 146 of the English Companies (Winding up) Rules, 1949. Therefore, it is manifest that on a poll, may it be in the case of a general meeting of the shareholders of a going concern or may it be in the case of general meeting of creditors or contributories and that too either when the concern is in the course of reconstruction under section 153 or in the process of winding up, the mode of voting at least in form is the same, namely, either in person or by proxy. "A proxy", as defined in Stroud's Judicial Dictionary, "is a lawfully constituted agent (per SMITH L.J. in In re English, Scottish, and Australian Chartered Bank, an agent properly appointed (per LINDLEY L.J.), and semble (from the judgments of the Court of Appeal in that case), he need not, in the absence of a contrary regulation, be appointed in writing. However, in the court below, WILLIAMS J., said 'Under the Companies Act, generally, there can be to my mind no doubt but that the authority of the proxy must be in writing' and referring to the phrase 'Creditors present, either in person or by proxy', section 2, 33 and 34 Vict. c. 104, he added, that 'means a proxy authorised by an instrument in writing'; but referring to the same phrase SMITH L.J. said, it 'means, either in person or by his lawfully constituted agent and not by the instrument of proxy, the proxy paper, if this be an instrument of proxy and it is not absolutely necessary to produce it at the meeting for which it is to be used, unless there be some requirement to that effect."

In other words a proxy is a creature of law of agency, though with this difference that under the company law such an agent has to be appointed in a manner as provided thereunder. Therefore, so far as voting by proxy is concerned that can be done on behalf of any person, may it be natural or artificial, so long as that person is in a position to appoint a proxy as provided in law. But the position is different where voting is to be done in person. In that case it is necessary that the voter must posses a person within the ordinary meaning of that word, that is, physical person which a natural person is always possessed of but not a legal entity like a company or a corporation. Therefore, unless by some legal fiction a person is provided to a company or a corporation, it cannot do any act that the law requires to be done in person, for example, a company cannot appear in person before a tribunal, Tritonia Ltd. v. Equity and Law life Assurance Society, and that is the reason why originally law was not prepared to reconcile itself to the concept that a person like a corporation could vote at all in person.

That being so, in the early stages the provision made for a corporation to vote was confined to the system of voting by proxy alone. Subsequently, however, as and when the tide of company enterprise rose, the policy of the Legislature had to change with the result that gradually the concept of a corporation voting in person crept into the statute. The first provision made to the effect in the English Companies Act was the one enacted in the year 1908 but even therein the right was confined to a member corporation only; that means, that right was not yet extended to a creditor corporation. That came to be provided for the first time in English law in the year 1929 and it is only since then that in English law in the matter of voting in person a corporation whether it be in the position of a member or a creditor has been placed on equal footing. But in the Indian system of law the position even thereafter remained the same as it was under the Act of 1913, and it was only recently that under the new Companies Act, 1956, a similar provision has now been made in section 187, which for all practical purposes in this respect is the same as what was provided in the English law so far back as 1929. Section 187 of our new Companies Act, 1956, reads :

"(1) A body corporate (whether a company within the meaning of this Act or not) may -

(a) if it is a member of a company within the meaning of this Act, by resolution of its board of directors or other governing body, authorise such person as it thinks fit to act as its representative at any meeting of the company, or at any meeting of any class of members of the company;

(b) if it is a creditor (including a holder of debentures) of a company within the meaning of this Act, by resolution of its directors or other governing body, authorise such person as it think fit to act as its representative at any meeting of any creditors of the company held in pursuance of this Act or of any rules made thereunder, or in pursuance of the provisions contained in any debenture or trust deed, as the case may be.

(2) A person authorised by resolution as aforesaid shall be entitled to exercise the same rights and powers (including the right to vote by proxy) on behalf of the body corporate which he represents as that body could exercise if it were a member, creditor or holder of debentures of the company."

But all the same, the fact remains that here also this final stage has been achieved in two stages. The first was in the year 1913 when under section 80 of that year's Act the following provision was made :

"A company which is a member of another company may, by resolution of the directors, authorise any of its officials or any other person to act as its representative at any meeting of that other company, and the person authorised shall be entitled to exercise the same powers on behalf of the company which he represents as if he were an individual shareholder of that other company."

And then it was for the first time in 1956 that it was developed into what is now provided in our present section 187. But as the present case is admittedly one governed by the old Act of 1913, the contention advanced by Mr. Dutt is that, therefore, in any case, section 80 of the Indian Companies Act, 1913, cannot be an authority for the proposition that the action of Sri Arjun Prasad in voting in person on behalf of the aforesaid two companies at the general meeting of the unsecured creditors was valid in law and this much Mr. Choudhary also concedes. But the contention of Mr. Choudhary is that the matter does not end there; otherwise what is provided in section 153 of the Indian Companies Act, 1913, in regard to a creditor voting in person will have to stand practically abrogated at least in relation to the voting right by an artificial entity like a corporation.

Therefore, his submission is that the provision of law as laid down in section 153 of the Indian Companies Act, 1913, is not to be read in the light of what is provided in section 80 of the Indian Companies Act, 1913, or what is provided in rule 150 of the Patna High Court Rules, but rather as an independent provision by itself. Mr. Choudhary contends that a proceeding under section 153 of the Indian Companies Act, 1913, is a proceeding independent by itself and is not in any way related to a proceeding which is one for a concern going or for a concern in liquidation. And if that is so then section 153 of the Indian Companies Act ex proprio vigore implies that a corporation creditor like any other creditor may vote not only by proxy but in person also, and if there is any lacuna in the section about the procedural part of it then that lacuna, according to learned counsel, can be very conveniently removed with the help of the general provisions of company law and specially those provided in regulations 71 and 91 of the Indian Companies Act, 1913. In my opinion, this contention is not correct.

When properly analysed, this will be found to be based on the assumption that the word "person" as used in section 153 of the Indian Companies Act, 1913, means not only a natural person but also an artificial person like a corporation unlike its implication as used in section 79 or regulation 64 of the Indian Companies Act, 1913, or as used in rule 144 of the Rules framed by this court. But I think there can be no justification for such an assumption either in law or in fact. In the first place, the word "person" as understood in its ordinary sense generally implies a natural person and not a person artificial unless there is a provision made for it either expressly or by necessary implication.

Mr. Chatterji appearing for the liquidator has rightly in this connection drawn our attention to the decision in Wills v. Tozer. In that case the section to be interpreted was section 36 of the Harbour Act, 1853, which provided that the commissioners.

"shall be elected by a majority of the votes of the persons present and entitled to vote at the respective meeting for the election, such votes to be given in writing under the hands of the respective voters, but a proxy not to be in any case admitted."

But in spite of the specific provision made in the supplementary Act, which had been incorporated into it to the effect that "a person included a corporation unless there was something in the subject or the context repugnant to such construction." Mr. JUSTICE FARWELL held that :

".... the decision he had come to was against his inclinations, but the words of the Act were too strong for him. Section 36 contained expression which he could not reconcile with the construction that 'person' included corporation."

Secondly, I think that what is provided in section 153 of the Indian Companies Act, 1913, for voting in person in relation to a creditor is confined to such creditors only who are in a position to fulfil that condition and it cannot be denied that one of the essential conditions required under section 153 of the Indian Companies Act, 1913, for a creditor to vote is that he should be present either in person or by proxy. In the normal course a corporation being an impersonal entity cannot be present in person. That being so, the condition which is binding for a person to vote in person is normally absent in the case of a corporation. Therefore, that also lends support to the view that in a meeting held under section 153 of the Companies Act, 1913, a corporation cannot vote in person unless there is specific provision made for it.

A similar question as the one before us came up for discussion in Pharmaceutical Society v. London Provincial Supply Association Ltd., where LORD SELBORNE observed :

"I think the principle laid down by the junior counsel for the respondents was substantially right; that if a statute provides that no person shall do a particular act except on a particular condition, it is, prima facie, natural and reasonable (unless there be something in the context, or in the manifest object of the statute, or in the nature of the subject-matter, to exclude that construction) to understand the Legislature as intending such persons, as, by the use of proper means, may be able to fulfil the condition; and not those who, though called 'person' in law, have no capacity to do so at any time, by any means, or under any circumstances, whatsoever."

Thirdly, it has to be remembered that this part of the provision for voting as is stated in section 153 is much the same as the one provided for a winding up concern in rule 144 or the one provided for a going concern in section 79(e) or in regulation 64 of the Indian Companies Act, 1913. And if it is to be accepted that the phrase "a member or a creditor may vote either in person or by proxy", when read with regulations 71 and 91 of the Indian Companies Act, 1913, provides an exhaustive code on the subject then I see no reason why the same phrase when used in section 79(e) of the Indian Companies Act, 1913, and rule 144 of this court could not have served that purpose when read in the context as stated above and why the Legislature at all thought it necessary to make any special provision for a member company in section 80 of the Indian Companies Act, 1913, and for a creditor company in sub-section (b) of section 187 of the new Companies Act, 1956.

Then lastly, the very fact that section 153 of the Indian Companies Act, 1913, is silent on the point as to how a corporation can vote in person, if it may so vote at all, gives further strength to the view taken above and I must say that Mr. Choudhary was also well alive to this difficulty and that is why he has tried to meet it by contending that the lacuna, if any, in this respect, can be met with by supplementing section 153 with the provisions of law as laid down in regulations 71 and 91 of the Indian Companies Act, 1913.

In my opinion, this view is not consistent with the import of these regulations as they stand. Regulations 71 and 91 lay down a procedure which is to control and guide the internal administration of a company and is never meant to be imposed by that company on any other company in case it happens to be a member or a creditor of the other. Thus, looked at from any point of view, there is no substance in the contention advanced by Mr. Choudhary that the word "person" includes an artificial person like a corporation or that section 153 is a self-contained code.

And so far as the references made in (1) Halsbury's Laws of England (Simonds Edition) Volume 6 at page 765, foot-note (e) and at page 610, paragraph 1200; (2) The Principles of Modern Company Law by L. C. B. Gower at pages 8, 126 and 524; (3) Handbook on Joint Stock Companies by Gore-Browne, Forty-first Edition, page 413, and (4) Buckley on the Companies Acts, 12th Edition, at pages 328, 844 and 889 (article 102), are concerned, they are not at all helpful in construing section 153 of the Companies Act, 1913; for it has to be noted that the discussion in all these references is in the background of section 139 of the English Companies Act, 1948, which makes a specific provision for a corporation to vote in person and that not only as a member corporation but also as a creditor corporation. Therefore, they cannot be of any assistance in interpreting section 153 of the Indian Companies Act, 1913, in the background of its section 80 wherein the provision made for a corporation to vote in person is confined to its capacity as a member corporation only and is not in relation to its capacity as a creditor corporation.

That means, in the case of a proceeding like the one before us, which is controlled exclusively by the Act of 1913, a creditor corporation, as contemplated under section 153 of that Act, can vote only by proxy and not in person. Further, as pointed out by Mr. Dutt, the only provision wherein a reference has been made in relation to the Indian Companies Act, 1913, as to how a creditor corporations is to vote is to be found in rule 150 alone which has been framed by this court under the powers given to it thereunder. That rule provides :

"Where a corporation is a creditor, any person who is duly authorised in writing by the corporation to act generally on behalf of the corporation at meetings of creditors and contributories and to appoint himself or any other person to be the corporation's proxy, may fill in and sign the form of proxy on the corporation's behalf and appoint himself to be the corporation's proxy and a proxy so filled in and signed by such a person shall be received and dealt with as the proxy of the corporation."

That means, under this rule also the mode of voting that is allowed in the case of a corporation creditor is one by proxy alone and not in person. Further, it has to be noted that this rule falls under the heading "proxies" in relation to general meetings of creditors and contributories as mentioned therein. And, even then though the first rule under that heading, namely, rule 144, opens with the general provision that a creditor may vote either in person or by proxy but when it comes to deal with the procedure as to how a creditor corporation is to vote, it confines that provision to the voting by proxy alone. Therefore, this also by analogy suggests that the mode of voting in the case of creditor corporation as is contemplated under the Act is one by proxy alone.

It has, however, been argued by respondent No. 1 that on the language of those rules and in the context in which they have been framed, they are not at all applicable to a proceeding under section 153 of the Indian Companies Act, 1913. On the contrary, what they speak about is a proceeding under liquidation only. Therefore, they are of no assistance to us in construing section 153 of the Indian Companies Act, 1913. Further to support this contention Mr. Shree Nath Singh, who appears along with Mr. Choudhary, has added that though in the year 1936, section 246 of the Indian Companies Act was amended and as a result of that amendment its scope was widened inasmuch as the section, as it stands, empowers the High Court to frame rules not only for the mode of proceedings to be had for winding up of a company in such court or in courts subordinate to it but also amongst others for the holding of meetings of creditors and members in connection with the proceeding under section 153 of the Indian Companies Act, 1913, and that though thereafter the rules as originally framed under the old section 246 were in the light of some of the amendments recast here and there, as is evident from the heading of the Rules, which reads - "Rules framed by the High Court of Judicature at Patna under section 246 of the Indian Companies Act (Act VII of 1913) as amended by Act XXII of 1936" - yet in spite of all these changes there is so far no provision made at least in terms for a meeting held under section 153 of the Indian Companies Act, 1913.

In my opinion, this want of clarity in these rules is there and Mr. Dutt also to that extent concedes. But his submission is that though strictly speaking it may be so and in the absence of any specific provision to that effect therein it may be difficult to hold that they as a rule apply to all proceedings under section 153 of the Indian Companies Act, 1913, yet that cannot be a ground for saying that they do not apply at least to the present proceedings and that for two reasons.

The first is that though section 153 of the Indian Companies Act, 1913, does provide that the meeting held thereunder shall be called, held and conducted in such manner as the court directs, but in the present case there was no such direction ever made by the learned company Judge. The second is that the present proceeding under section 153 of the Indian Companies Act, 1913, was after all one which was taken up while the company was already in the process of winding up. Therefore, according to Mr. Dutt, in the absence of any other provision on the subject, this rule 150 can alone be a proper guide for a proceeding like the one before us.

In my opinion, on principle this argument seems to be correct, and if that is so, which I think is so, then it has to be held that rule 150 of this court is applicable at least to a proceeding like the one before us and as that rule in the case of a creditor corporation speaks of voting by proxy alone and not in person, therefore, the contention of Mr. Choudhary contrary to it has to be rejected. Then a question has been raised as to why at all in the case of a creditor corporation special provision had to be made in rule 150 if the right to vote by proxy was already provided there in rule 144.

The simple answer to that question is that in the case of a creditor corporation perhaps it was thought advisable that it should not be made to suffer from those limitation which rules 147 and 148 impose in the case of creditors who are natural persons. That means in the case of a creditor corporation the proxy may be any person and not necessarily a creditor and that person may fill in and sign the form of proxy on the corporation's behalf and appoint himself to be the corporation's proxy. All that is needed by such a person is that he should have been authorised in writing by the corporation to act generally on behalf of the corporation at meetings of creditors and contributories and to appoint himself or any other persons to be the corporation's proxy.

The contention of Mr. Choudhary, however, in this connection is that a corporation or a company has as a rule three phases of life - the one, as the going concern, the other, as one in the process of reconstruction and the third, as one in the process of winding up - and these phases, as contended by him, are in the nature of water-tight compartments. Therefore, the rules applicable in the case of one do not apply to the case of the other. I think, this argument is not at all substantial. After all a proceeding taken for reconstruction in a case where winding up order has already been passed, as in the case before us, is nothing but an alternative mode of liquidation, which by operation of law relieves the company and its contributor is from liability further than that which is contemplated or imposed by the scheme (In re London Chartered Bank of Australia; Dane v. Mortgage Insurance Corporation; Finlay v. Mexican Investment Corporation. Further section 153 of the Indian Companies Act, 1913, as is clear from the provisions made therein, is applicable both to a going concern which is already in the process of winding up.

Therefore to the extent to which it applies in a case where a winding up order has already been passed, there is an overlapping between a proceeding taken in the course of winding up and one taken up for reconstruction thereafter. Therefore, in the absence of any direction given in that behalf by the court or so long as there is no specific provision made by this court under the rules framed by it for a meeting under section 153 of the Indian Companies Act, 1913, there is no reason why the rules as framed by this court cannot be held applicable at least mutatis mutandis to such a proceeding if taken after an order of liquidation has already been passed.

In the present case it is not claimed that Sri Arjun Prasad in voting on behalf of the aforesaid two companies acted as their proxy; rather the specific claim made on his behalf is that he acted on their behalf in person and that on the basis of the resolutions passed in his favour to that effect by those corporations. Therefore, in the absence of any proxy having been filed by Sri Arjun Prasad, the votes cast by him on behalf of the two corporations, namely, Bhadani Brothers and Hindustan Coal Co., should not have been counted in calculating the result of the approval of the unsecured creditors in the meeting held on 9th November, 1953, as contemplated under section 153 of the Indian Companies Act, 1913.

Next in the alternative it has been argued that even if it be so, that means, even if the votes cast by Sri Arjun Prasad in person on behalf of the aforesaid two corporations be eliminated from consideration still there is sufficient margin left to give the necessary statutory majority in support of the approval of the scheme provided the votes cast in the meeting held on 9th November, 1953, are properly calculated.

This contention, however, is essentially based on the grievance that the chairman at the meeting held on 9th November, 1953, should not have accepted the proxies filed by Mr. G. K. Verma on behalf of Sales Tax Department and Mr. P. K. Bose on behalf of Eastern Railway and it is said that if that had been done, the votes cast by them, which they exercised against the scheme, would not have been counted and thus the total value of votes cast against the scheme should have been much less than Rs. 1,38,173-3-8 1/2 pies as reported by the chairman.

Now the facts on the record shows that the value of votes cast by Mr. G. K. Verma on behalf of Sales Tax Department was Rs. 32,098 and that of the votes cast by Mr. P. K. Bose on behalf of the Eastern Railway was Rs. 26,551. Therefore, on this basis the case of respondent No. 1 is that if the total value of these votes, namely, Rs. 58,649, which were against the scheme be eliminated from the total of Rs. 1,38,173-3-8 1/2 then what is left is still less than one-third of the remainder which will be found after deducting the votes of Bhadani Brothers and Hindustan Coal Company from the total value of the votes which had been cast in favour of the scheme, namely, Rs. 6,97,790-6-9. Now the ground given in support if this claim for discarding the votes of these two creditors is that the proxies submitted by Mr. P. K. Bose and Mr. G. K. Verma suffered from the same defects which led to the rejection of the votes cast by Mr. J. P. Singh on behalf of Chini Mazdoor Sangh and Mr. G. G. Dubey on behalf of Pranlal Valji.

That being so, it is argued that if the chairman was of opinion that the proxies submitted on behalf of Chini Mazdoor Sangh and Mr. G. G. Dubey were not in accordance with law and as such not admissible then on the parity of reasoning Mr. P. K. Bose and Mr. G. K. Verma should also not have been allowed to take part in the voting. In my opinion this reasoning given in support of the alternative argument is rather too academic and is essentially based on the question as to whether the findings given by the learned company Judge on the validity of the proxies filed by Mr. P. K. Bose and Mr. G. K. Verma are still open to be attacked in the manner and on the ground as it has been attempted to be done here.

In my opinion not and that for two reasons. First on the ground that the appeals before us on behalf of the appellants are directed against that specific part of the order whereby the learned company Judge has dismissed their objection relating to some particular creditors who had voted in support of the scheme and not against any of that part of the order which deals with the votes cast against the scheme.

If the respondents were dissatisfied with the order passed by the learned company Judge as to the votes cast by Mr. P. K. Bose on behalf of the Eastern Railway and Mr. G. K. Verma on behalf of the Sales Tax Department, who had voted against the scheme, the proper course open to them was to prefer an appeal against those particular orders and not to reopen the decisions by way of reply to the present appeals which relate to orders other than those. In the second place, though it is true that ultimately in the concluding portion of the judgement the learned company Judge does observe :

"It is, therefore, unnecessary to consider whether the chairman was right in allowing Shri G. K. Verma and Shri P. K. Bose to represent the Sales Tax Department and the Eastern Railway"

yet it appears that the learned company Judge in the course of his discussion in those cases has taken into consideration some facts also which go a long way to show that the objection raised against the votes cast by these persons are not even on merit tenable. While dealing with the case of Mr. P. K. Bose, who voted for the Eastern Railway, the learned company Judge has observed :

"Mr. Bose stated that his authority to appear on behalf of the Railway was challenged at the meeting, that he produced his authority which was in writing, and that all concerned, including the chairman, were satisfied with that authority. He further stated that he took back the authority, and returned it to the Railway officials concerned. Similarly, any one else whose authority may have been challenged at the meeting may have produced sufficient materials to satisfy the chairman and all those present at the meeting. Even if any objection had been raised after submission of the chairman's report, the party concerned could have taken steps for the production of necessary materials to meet the objection."

And this is fully in conformity with the principle laid down in Bengal Bank Ltd. v. Suresh Chakravarthy. Further, as already stated, the true test in such a case is whether the man voting had the necessary authority or not and not the fact whether the evidence necessary to prove the same was sufficient to satisfy the chairman in proof of his authority. Furthermore, the facts brought on the record unambiguously establish that the necessary authority had been produced by Mr. Bose and that the chairman had satisfied himself about it.

Therefore, the objection now raised as against the votes cast by Mr. Bose on behalf of the Eastern Railway is not at all tenable. Similar is the position in regard to Mr. G. K. Verma. He presented the Sales Tax Department and the authority produced by him is included in the paper book at page 7. There is nothing therein to show that authority was in any respect invalid. Therefore, the objection as against the votes cast by him on behalf of the Sales Tax Department also fails.

Lastly, I may mention here that so far as the votes cast by Mr. J. P. Singh on behalf of Chini Mazdoor Sangh and Mr. G. G. Dubey on behalf of Pranlal Valji are concerned, they had been rejected on a ground entirely different and not on one which is now said to be applicable in the case of proxies filed by Mr. Bose and Mr. G. K. Verma. In the case of Mr. P. J. Singh, who voted for Chini Mazdoor Sangh there was no proxy received from that Sangh at all. It is true that the learned company Judge has observed that :

"It is possible that some authority was submitted by Shri J. P. Singh before the chairman, authorising him to represent the Chini Mazdoor Sangh."

But this observation on the very face of it is based on mere supposition; though as a matter of fact there is nothing on the record to show that Chini Mazdoor Sangh had given proper authority to Mr. J. P. Singh to vote on its behalf. In the case of Mr. G. G. Dubey, the only objection raised was that the proxy form executed by Pranlal Valji had not been duly attested.

In answer thereto the learned company Judge has held and I think rightly that in the absence of any specific direction by the court in regard to the form of proxy to be filed in this case, it was not necessary at all to get the proxy attested. In view of these reasons I think there is no substance in the contention advanced by Mr. Choudhary that the order passed by the learned company Judge in regard to the votes cast by Mr. G. K. Verma and Mr. P. K. Bose is not sustainable in law.

This was all the discussion on the merits of the questions raised before us. Then Mr. Choudhary has also raised a contention as to the maintainability of these appeals. The main reason given for this latter contention is that the order under appeal is not a judgement within the meaning of clause 10 of the Letters Patent of our court, and in support of this contention reliance has been placed by the learned counsel on the decisions in Asrumati Debi v. Rupendra Deb, Govind Lal v. Administrator-General of Bihar and Vishnu Pratap v. Revati Devi.

In my opinion, so far as these authorities are concerned, they on their very face are distinguishable. The decision reported in Govind Lal v. Administrator-General of Bihar relates to a probate case and the appeal thereunder was directed against the decision of the first court refusing to recall an order. In those circumstances, a question was raised whether any such appeal lay under clause 10 of the Letters Patent or not. In answer thereto NARAYAN J. with whom IMAM C.J. (as he then was) agreed held, as is stated in the placitum of the case that :

"The term 'judgement' in the Letters Patent of the High Courts means 'decree' and not 'order'. The mere fact that a particular order is one from which an appeal lies as an appeal from an order does not make that order a decree which is the meaning attached to the word 'judgement' as used in clause 10 of the Letters Patent. Therefore if one of the parties comes and asks the Judge to recall the order either under his power of review or under his inherent power and the Judge merely refuses to take any steps in the matter, such an order is not a 'judgement' within the meaning of clause 10 of the Letters Patent."

The decision reported in Asrumati Debi v. Rupendra Deb, related to the question whether an order for transfer of a suit made under clause 13 of the Letters Patent of the Calcutta High Court was or was not a judgement within the meaning of clause 15. In answer thereto their Lordships held that such an order was not appealable and in support of that order they opined :

"The order in the present case neither affects the merits of the controversy between the parties in the suit itself, nor does it terminate or dispose of the suit on any ground. An order for transfer can not be placed in the same category as an order rejecting a plaint or one dismissing a suit on a preliminary ground as has been referred to by COUCH C.J. in his observations quoted above. An order directing a plaint to be rejected or taken off the file amounts to a final disposal of the suit so far as the court making the order is concerned. That suit is completely at an end and it is immaterial that another suit could be filed in the same or another court after removing the defects which led to the order of rejection. On the other hand, an order of transfer under clause 13 of the Letters Patent is, in the first place, not at all an order made by the court in which the suit is pending. In the second place, the order does not put an end to the suit which remains perfectly alive and that very suit is to be tried by another court, the proceedings in the latter, to be taken only from the stage at which they were left in the court in which the suit was originally filed."

The appeal in Vishnu Pratap v. Revati Devi related to an order which was passed by a single Judge of the Allahabad High Court appointing an interim receiver under section 153C(8) of the Companies Act, read with Order XL, rule 1, of the Civil Procedure Code pending the final disposal of an application under section 153C. On those facts one of the questions that cropped up for decision was whether such an order was appealable under section 202 of the Companies Act. In answer thereto their Lordships while distinguishing the case in Levy Brothers and Knowles, Ltd. v. Subodh Kumar, held :

"It would thus appear that the order was made in the matter of the winding up of a company and it has nothing to do with an order like the one before us appointing an interim receiver pending the final disposal of an application under section 153C. We are, therefore, not satisfied that the appellants have any right of appeal under section 202, Companies Act."

Then reverting to the question whether such an appeal could lie under the Letters Patent, their Lordships observed :

"Coming now to clause 10 of the Letters Patent, a great deal of controversy has raged round the word 'judgement' and what it means. In the Letters Patent itself we have several clauses in which provisions are made for appeals. Clause 10 deals with an appeal from the judgement of a single Judge. Clause 30 deals with appeals to the Privy Council from any final judgement, decree or order of the High Court. Clause 31 provides for appeals to the Privy Council against certain preliminary or interlocutory judgement, decree, order or sentence of the High Court. Clause 32 provides for an appeal to the Privy Council against judgment, order or sentence made by the High Court in the exercise of original criminal jurisdiction. It would thus appear that in dealing with appeals to the Privy Council the words used are 'judgement, final or preliminary, or interlocutory, decree, order or sentence', while in dealing with appeals from one judge to a bench of the same court only the word 'judgment' has been used. There being no appeal under the Letters Patent in criminal matters from one Judge to a larger number of Judges the word 'sentence' could easily be omitted. There is also no appeal from an order passed by a single Judge in the exercise of revisional jurisdiction. Appeals only lie from judgment in civil matters in the exercise of ordinary or extraordinary original jurisdiction of the court and, with the leave of the Judge, against a decree or order made by him in the exercise of appellate jurisdiction against a decree or order made by a subordinate court. In section 205, Government of India Act, providing for appeals to the Federal Court the words used are 'judgment, decree or final order'.

In Mohammad Amin Brothers Ltd. v. Dominion of India, the point arose whether an order under the Letters Patent setting aside an order of a single Judge directing the compulsory winding up of a company was a final order against which an appeal lay to the Federal Court and, it having been held that it was not a final order an argument was raised that it may be a judgment if it was not a final order. Their Lordships held that by reason of the collocation of the words the word "judgment" would not include interlocutory judgment and observed as follows :

'In English courts the word judgment is used in the same sense as a decree in the Civil Procedure Code and it means the declaration or final determination of the rights of the parties in the matter brought before the court.'

and referred to a previous decision of the same court in Kuppuswami Rao v. The King. In that case KANIA C.J. observed :

'It is next necessary to ascertain the meaning of the words judgement and decree. In England in civil actions a decree is understood to be the same as a judgment. If so, as there may be a preliminary decree, there may be a preliminary judgment.'

His Lordship mentioned the case of Onslow v. Commissioners of Inland Revenue where LORD ESHER M.R. said :

A judgment, therefore, is a decision obtained in an action, and every other decision is an order.'

KANIA C.J. said : 'These and other English decisions makes it clear that in England when the word judgement or decree is used, whether it is preliminary or final, it means the declaration or final determination of the rights of the parties in the matter brought before the court.'

His Lordship pointed out that definitions of the words 'judgment' and 'decree' in the Code are applicable merely to that Code. Those definitions, therefore, are not helpful."

It is, therefore, clear the none of these decisions given in appeal refer to or arise out of section 153(7) of the Indian Companies Act, 1913, which was enacted for the first time in the year 1936. Therefore, they are not helpful on the point raised here that the present appeals, which have been admittedly under section 153(7) of the Indian Companies Act, 1913, are not maintainable in law and competent.

Now coming to the question as to how far the word "judgment" as used in clause 10 of the Letters Patent is applicable to the present order under appeal, it has to be conceded that the controversy in this regard is not free from difficulties. But, broadly speaking, this much seems to be well established both on principle and authorities that the word "judgment" as used in clause 10 of the Letters Patent does at least include those orders which finally determine a dispute between the parties.

If that is so then in the present appeals it is difficult to hold that the order under appeal does not determine a dispute between the propounder of the scheme on one side and the objecting creditors on the other at least to the extent to which it decides the question as to how far the proposed scheme was or was not approved by the statutory majority as contemplated in law.

It is the admitted case of the parties that on the poll taken in the meeting held on 9th November, 1953, the result would have been otherwise had the votes cast by Shri Arjun Prasad on behalf of Bhadani Brothers and Hindustan Coal Co., in person been rejected and eliminated from the poll. In other words, in the latter case the scheme could not be placed before the court for the necessary sanction as contemplated under section 153 of the Indian Companies Act, 1913.

Therefore, it is manifest that in such circumstances any order dismissing the objection raised on behalf of those who were in opposition to the scheme finally determines and concludes their right of dissent to the same. That being so, I have no hesitation to hold that the order under appeal is a judgment within the meaning of the word as used in clause 10 of the Letters Patent. In other words, the appeals are competent.

In the result, therefore, it has to be held that Sri Arjun Prasad (respondent No. 1) in law as laid down in the Indian Companies Act, 1913, and the rules framed thereunder was not entitled to vote in person on behalf of the aforesaid two corporations, namely, Bhadani Brothers and Hindustan Coal Co., and as such the votes cast by him in person on their behalf without filing any proxy in the meeting of the unsecured creditors held on 9th November, 1953, are invalid and inoperative. Accordingly the order of the learned company Judge as to this part of the case is set aside and the appeals are allowed. But in the circumstances there will be no order as to costs.

K. DAYAL J. - I agree.

[1986] 60 COMP. CAS. 14 (DELHI)

HIGH COURT OF DELHI

Dineker Rai D. Desai

v.

R. P. Bhasin

R. K. KAPUR AND D. P. WADHWA JJ.

COMPANY APPEAL NO. 13 OF 1983

MAY 9, 1984

K. K. Mehra and Miss Poonatn Wadhwa for the petitioner.

S. N. Kumar and Man Mohan Krishan for the Respondent.

JUDGMENT

D. K. Kapur J.—Company Petition No. 58 of 1979, which is a petition under sections 397 and 398 of the Companies Act, 1956, is pending before the company judge. Company Application (C. A. No. 111 of 1983) was moved by the petitioners seeking directions regarding the year ending March 31, 1982. The application was filed on February 7, 1983. It was claimed in the application that the existing executive committee of the company became functus officio on September 30, 1982, and could not legally function beyond that date. The annual general meeting had already been delayed and it was prayed that certain articles and rules should be changed or amended to bring about a fair and legal meeting and elections. It was also prayed that the register of members should be corrected first and bogus members be removed. Furthermore, it was claimed, the elections should be held under the supervision of the court with an impartial and independent chairman.

This application was decided on July 22, 1983, by the impugned order. The appellants have challenged the various directions made in the order as well as the changes made in the articles of association and election rules of the company.

It must here be stated that disputes relating to the motion pictures association have been before the court almost continuously since the year 1973 and various orders of various company judges have been passed during the pendency of these petitions and other proceedings before the company court regarding the holding of the annual general meeting. The order under appeal is, however, somewhat different from orders made in the past, because in the past, either directors have been appointed to the company or an observer, has been appointed regarding the meeting. In the present case, a committee has been appointed to hold the elections and also drastic changes have been made in the election rules and also the method of elections, which have been challenged on various grounds before us on the footing that the court cannot depart from the Companies Act with regard to the holding of the annual general meeting and also complaining that the election procedure cannot be changed so as to deprive a number of members of their right to stand for elections, and also, complaining that the elections are almost impossible to be held under the directions made by the company court.

It must here be said that the court has not been very successful regarding the conduct of elections in the past. The company petition has been pending from 1979 and notwithstanding the orders of the Supreme Court passed in 1982 that the case should be heard day to day and decided in two months, it is still far from a decision even in 1984. At the same time, it appears that subsequent elections and the annual general meeting and so on are also under challenge in various sub-proceedings. It is, therefore, imperative to re-think over this matter in a practical manner rather than create a situation in which every election is liable to be challenged in proceedings before the company judge, thus making it impossible to decide the main petition.

Now, the various alterations made by the company judge in the order under appeal can be set out and analysed. The court has given its reasons in one order and then, as two sub-annexures to this order, has given directions regarding the holding of the meeting and changes to the election rules.

It is necessary now to analyse the directions first. It is stated therein that the elections were to be held on May 30, 1983, but in view of the changes in the election rules and procedure, the same have been postponed. The actual dates and programme have now to be decided by the committee appointed by the court. The court has then appointed three persons, namely, Shri Shyam Behari Mehra, Shri K. M. S. Khan and Shri R. K. Kaul, Joint Registrar, of this court, to be the committee of which Shri R.K. Kaul is to be the chairman with a casting vote. The committee can take assistance of other officials of the court. The elections are to be conducted by this committee at Delhi, Kanpur and Allahabad. The dates for voting have to be decided by the committee. Before the elections can actually be held, the voters' list is to be correctly made to represent the membership. An authenticated list of members is to be prepared and objections invited. The list is first to be corrected up to January 12, 1982, and then a separate list made of persons who have become members after that date and objections also invited to that list. Members who are in arrears of subscription are required to make up their deficiency and elections to be conducted in accordance with the election rules as amended by the court. Though these directions may appear innocuous, they are actually drastic departures from the Companies Act and it is difficult to see how this committee can hold the annual general meeting at three places under the Companies Act.

The next set of directions in the judgment are the amendments to the election rules. The changes are with regard to how a representative of a company or a representative of a partnership firm can vote or stand for election. According to the first amendment, such representatives can stand for election, but this was not permitted under the existing election rules. The second amendment is that the authorisation to the representatives of firms or companies should be in the prescribed form and a copy of the resolution of the firm or company should be sent to the association. The third amendment is that annexure II to the articles of association is deleted. The fourth amendment is that no person, who has been a member of the executive committee for two years is entitled to contest unless there is a gap of one year. The fifth amendment is that natural persons cannot vote more than once. The sixth amendment is that a firm can be a candidate and the seventh amendment is that a director, secretary or manager of a company can be a candidate. The next amendment is that the elections should be held at three places, Delhi, Kanpur and Allahabad. The last amendment is that any provisions of the articles of the company or election rules inconsistent with these amendments will stand amended.

In order to understand these amendments, it is also necessary to understand the set up of the company. The company can have as its members, natural members, company members and partnership firm members. These persons must either be exhibitors or distributors of motion pictures in Delhi or Uttar Pradesh. There are various provisions in the articles as to how a person ceases to be a member. In order to continue to be a member, the member must have a cinema or a film for distribution. There are also other provisions for debarring a member such as failure to pay subscription or failure to pay the dues. As the motion picture business is a continuous one and, sometimes, a hazardous one, it happens that persons who own cinemas will sell them, or persons who have the distribution of films go out of business, either on failure, or due to transfer of the business. There is, therefore, a continuous influx of new members and outgoing of old members. This is bound to happen because of the nature of the business. At the same time, there can be changes in partnership firms brought about by retirement, death, dissolution and so on. The voting rights of the members are also fixed by the articles and election rules. No proxy voting is allowed. In the case of natural members, the member must be present in person. In the case of the company members, the person voting must be authorised by a resolution of the company as provided by section 187 of the Companies Act. There is no difficulty about such persons. The difficulty is about partnership firms which are not normal members and companies as they are not legal persons for the purpose of holding shares. In this company, a partnership firm can be a member, and the question has arisen as to who can vote for such a firm and how. The procedure prescribed by the election rules is that all the members of the firm should jointly authorise one person to vote, who can then exercise the vote. The form for this is set out as annexure "E" to the existing election rules. It is an authorisation for a specific annual general meeting and allows the authorised person to vote at the annual general meeting and also at the elections at that meeting. The amendment made by the court in Company Petition No. 32 of 1976 was that the secretary shall issue a letter of authorisation to partnerships concerned to nominate a partner and all the partners should sign that authorisation letter. There is also a date fixed, i.e., 45 days before meeting when that letter is to be issued. There seems to be some difficulty in working out this annexure. We think the company judge is right in making a departure from this annexure. In order to make this matter specific, we would point out in the course of this judgment what we think should be the amendment.

The other changes made in the election rules are such that it is difficult to see how the elections can be held. For instance, rule 6 of the existing election rules provides that non-members or attorneys or agents or representatives of any type of member cannot be a candidate. According to the proposed changes, directors of companies, secretaries or managers can also be candidates. At the same time, members of firms are also debarred under the existing rule which is as follows :

"Partners of partnership firms, members and representatives of body corporates, even though authorised under section 187 of the Companies Act, 1956, cannot nominate or be nominated."

The purpose of the existing rule was to ensure that only persons who were members in their own right could be candidates and not persons who were either partners or directors or employees or partnership firms or companies. We do not see why there should be any departure from the existing rules regarding who can stand for elections and none have been pointed out in the judgment. In fact, there is nothing about this in the application. We do not know why the company judge has differed from the existing rules regarding who can stand for election and become a member of the executive committee. As the rules stand at present, only natural members can stand and only natural members can nominate.

Then there is the question of voting. As far as the companies are concerned, there is no difficulty because all that the company has to do is to send its resolution under section 187 of the Companies Act, 1956, regarding who is the person authorised to vote. This is also set out in annexure "F" to the election rules. The case of partnership firms presents special difficulty which will be dealt with later on in the judgment.

The next amendment is that a person who has been a member of the executive committee for two years is not entitled to contest without a gap of one year. This has been introduced because it appears that the counsel stated that an amendment of this type could be made on the lines of the Bar Association of the Supreme Court. We fail to understand how the Companies Act can debar a person from standing for elections, if he wants to. There has to be a specific decision of the members to introduce a special article to create such a bar. If a meeting of the company amends the article to this effect, it will be a moot point whether the amendment will be valid. But, assuming it is valid, it must have the support of the requisite majority of the members. This is a drastic alteration of the democratic right of every member to stand for election. In the case of companies and partnership firms, the bar is created by the fact that the firm is the member and not the partner and in the case of the companies, the company is the member and not its director or manager. To explain this, section 187 of the Companies Act, 1956, has only to be referred to. It states that a body corporate whether a company under the Act or not can authorise such persons as it thinks fit to act as its representative at the meeting and such person can exercise the power of vote as if he was an individual member. This section is limited to companies and body corpo-rates and does not apply to partnership firms. It, therefore, comes about that a partner, who is a member of a firm which is itself a member, cannot stand for election and nor can a director or an employee of a company member. Any departure from this is a drastic change in the Companies Act and cannot be directed by the company judge. It is a legislative Act.

The next amendment is that one person can only vote once, i.e., if he votes in his own right, he cannot vote for any partnership firm or any company. This amendment is ununderstandable and seems to be inconsistent with the fact that a person can be a member in his own right and also a representative of a company or partnership firm. No partnership firm can vote except through a representative and the same applies to companies. This amendment is, therefore, totally unnecessary and seems to be inconsistent with the articles and the election rules. The next two amendments regarding the authority of firm members to be candidates or company members to have their own directors, secretaries or managers as candidates has already been dealt with.

Coming now to the two remaining amendments, namely, that the elections should be held at three places, Delhi, Kanpur and Allahabad and that the articles of association of the election rules inconsistent with the amendments shall stand amended, we think that the direction regarding the holding of the annual general meeting at three places cannot be given in law as it is inconsistent with the Companies Act, and this means that virtually all the proposed changes to the election rules have to be held to be unnecessary except the one relating to partnership firm members con-concerning which we will give separate directions.

It is now necessary to analyse the directions regarding the holding of the annual general meeting. These directions were challenged on a large number of points by learned counsel, but it seems unnecessary to analyse this matter too deeply as the scheme of the Companies Act is that there should be an annual general meeting each year at which the accounts are presented and are passed with or without modification, the report of the directors is presented, the auditors are appointed and the retiring directors are replaced by others. In most companies, only a few directors retire at the annual general meeting. In the case of this particular company, which is a section 25 company, all the executive members including the office bearers retire and have to be replaced by a new executive committee. In a company which has a share capital, the fate of the elections is determined by a majority of the votes determined from the shareholding. Thus, even if there is one member owning a large number of shares, he can outvote every person holding lesser shares because each share has one vote. In a company, like the present, there is only one vote per member because there are no shares. Thus, the annual general meeting to be held under the Act has to include not only the elections of the new executive committee but also the other ingredients of an annual general meeting. Various provisions of the Companies Act, like sections 166, 167 and 168, indicate that the annual general meeting has to be held and the consequences of not holding it may be a criminal offence. Section 173 indicates that the annual general meeting has to have its normal business, the consideration of the accounts, the balance-sheet and reports of the board of directors and auditors, the declaration of dividend, the appointment of directors and the appointment of auditors. The appointment of directors has, therefore, to be done at an annual general meeting and not otherwise.

The most important provision as far as the directions regarding the meeting are concerned are contained in sections 166(2) and 168 of the Act. Sub-section (2) of section 166 provides that the annual general meeting has to be called at a time or place during business hours on a day not being a public holiday and the meeting has to be held either at the registered office or at some other place within the same city, town or village where the registered office is situate. Thus, the annual general meeting has to be held at Delhi and cannot be held elsewhere. The direction regarding the meeting to be held at Delhi, Kanpur and Allahabad is, therefore, invalid as far as the Act is concerned.

Then section 167 allows the Central Government to call the annual general meeting. This shows that the court has not been given any power regarding the annual general meeting. The only power of the court was to call a meeting under section 186, but that was a meeting other than the annual general meeting. Even that power has been taken away by the Amendment Act of 1974. Thus, at present, the court has no power to hold an annual general meeting or even any other meeting of the company. On this ground, it is submitted that the directions of the court are ultra vires the Act. We would prefer not to go into this question because we do not think it necessary to direct that the meeting should be held at three places.

There are also other reasons for this. In the case of election for this particular company, there are no proxy votes allowed, so the member has to come in person or not to vote at all. The existing election rules show that the candidates and their representatives can object to the identity of the voters which has to be decided by the chairman of the meeting. This is rule 13. The chairman has to be an independent man as provided in rule 19. If the election is held at three places, the possibility of substitute voters, which is one of the problems, is likely to arise. As, in the case of any dispute, a reference to the records of the company may be necessary for purposes of identification, the most convenient place to hold the meeting is at the registered office or at some other place where the records can easily be brought.

Then we have to refer to section 168 which provides for prosecution in case of delay in holding the annual general meeting. The directions of the court are that the meeting" is to be conducted by three persons who are not directors. It is open to the court to appoint these three persons as directors of the company when they will be liable for the default if any. We fail to understand how they can be made responsible for holding a meeting which under law has to be held by the existing board of directors. There are two possibilities. Either the executive committee as existing cannot hold the elections in which case an order has to be sought from the Central Government under section 167, or it is the executive committee which has to hold the meeting, as they are the persons who are liable for any default under section 168. It is, therefore, essential that the executive committee should hold the elections. But, the court can make provision for the proper conduct of the elections by nominating a chairman as visualised by rule 19. We think that we should replace the direction by appointing a person to be the chairman of the actual meeting as far as the election part is concerned as visualised by rule 19 of the election rules of the company. The chairman so nominated will take over after the other business of the annual general meeting has been completed for the purpose of the elections. We will also give directions regarding assistance to the chairman by the officials of the court.

Turning now to the question of settling the register of members and the voters list, we are faced with a formidable set of objections and a great practical difficulty in complying with the order passed by the company judge. The only purpose of the directions was to hold the meeting, i.e., the annual general meeting. The register of members of the company for past years is quite immaterial. An investigation into how persons have become members or have ceased to be members is an endless process. There are too many ways in which a person ceases to be a member, to justify investigation prior to the meeting and this is a too long drawn out process for holding an annual general meeting. We would, therefore, be of the view that it is unnecessary for the committee to first make an investigation as to how many members have been removed from the membership. As the meeting has to be held within the statutory period, any delay is unjustified. The effect of the order has been to continue the executive board for nearly a year because the meeting was to be held in May, 1983, and as a result of the directions, it has been unnecessarily postponed. We have examined the report submitted by the board which shows that 498 persons have been removed from the membership of the association and only 142 members have joined from January 13, 1982, to July 31, 1983. Also, the membership as on January 12, 1982, was 1,359. Also, 400 persons had applied for membership between January 1, 1975, to July 31, 1983, which are still pending. As far as persons who have not become members are concerned, we do not think anything can be done by the company judge. As far as the persons who have been removed from membership are concerned, they have every right to move the court under section 155 of the Companies Act. If each of these cases is investigated independently, we doubt that the result recorded by the committee would have any legal backing or would have the effect of bringing them back. When there is an express provision of law, namely, section 155, enabling the company court to rectify the register, only the court has to act under that section or it can refuse relief. But, a general power of this type cannot be handed over to a committee. It is a judicial matter as to whether a person has been rightly or wrongly removed from membership. None of those persons appear to have moved the court by way of a petition under section 155 or by recourse to the civil court. We do not see why the court should make any investigation into this matter thus creating a lot of further complications in what would otherwise have been quite a simple procedure. We, therefore, think that there is no purpose in the court trying to rectify the register of members on its own initiative by a procedure which is somewhat different to that laid down in the Companies Act.

This brings us to the question as to how the voters list has to be settled. There is a procedure laid down in the election rules of the company. This states in rule 18 that the register of members shall remain closed eight clear days before the holding of the annual general meeting and no person will be admitted to membership thereafter. This means that when the date of the annual general meeting is announced, more members can be enlisted or allowed to join till eight clear days before the date of the meeting. Normally, such persons would be entitled to vote at that meeting, so there is no purpose in settling the voters' list in advance.

Then there is rule 17, which states that the secretary of the company shall prepare a role of members entitled to vote. These persons will be all proprietary firm members in their own right giving the name of the member who is entitled to vote ; the names of partnership firm members together with the name of the authorised partner in whose favour an authorisation has been given and, thirdly, the name of the authorised representative of company members in whose favour valid resolutions have been filed. Thus, the list consists of natural members and representatives, i.e., partners of firms who are entitled to vote and authorised members of company members. This rule further shows that persons in arrears of subscription are not included in the voters list.

So, the procedure visualised by the election rules is that the voters list will consist of members who are borne on the register of members which may consist of natural members, and partners of firms who have been authorised to vote. We see nothing wrong in this method of settling the voters list. It is designed to facilitate voting.

Now, we can visualise the worst situation that persons who are otherwise entitled to vote are removed from the voters list with a view to manipulate the elections. The chairman appointed by us will take into consideration any objections against wrongful removal from the voters list and allow the vote to be cast under objection separately if he thinks that there is some substance in the allegation of wrongful removal. We will give directions in this respect at the end of the judgment.

In the result, all the directions and amendments to the election rules as given by the learned single judge are set aside except to the extent indicated above. But, directions have now to be given regarding: (a) a chairman to be appointed for the elections as discussed above, (b) the procedure to be adopted by him regarding persons wrongly removed from the voters list, and (c) regarding the election rules, an amendment has to be made to enable partnership firms and companies for casting their votes in accordance with the said election rules.

Taking up the amendment to the election rules first, the relevant rule is rule 10, which provides as follows :

"10. Who can vote :

A member of the association, who is :—

(a) the proprietor of a proprietorship firm member ;

(b) Any one of the partners of a partnership firm member duly authorised by all other partners of such partnership firm to cast vote on behalf of the firms in writing, as per authority letter issued by the association in terms of annexure II of the articles of association passed by the Hon'ble High Court ;

(c) the managing director or any one of the directors or the secretary or any other officer of a company member duly authorised under a resolution passed by the board of directors of the company-member concerned, in terms of section 187 of the Companies Act, 1956, to cast vote on behalf of the company-member concerned (specimen copy of the resolution is attached in annexure 'F' hereto) can cast vote, provided, however, that :

(i) the required certified copy of the resolution and/or letter of authority in regard to the category of members under clause Nos. (b) and (c) above, in favour of the person authorised to cast vote, shall be filed in the office of the association at least 4 (four) clear days (excluding the due date of receipt of such resolution and/or letters of. authority and the date of the general meeting) before the date of the relevant general meeting at which the election is to take place, and if that day happens to be a holiday, on the day preceding it ;

(ii) the name of the member on whose behalf the authorisation/ resolution is being filed, is on the register of members of the association on the date of filing of such authorisation/resolution and continue to be so, until the date on which the register of members is closed, prior to the general meeting at which the election is to take place ;

(iii) a member, who has not paid the membership subscription in terms of article 20 of the articles of association, or any other dues to the association, and continues to be a defaulter, is not eligible to vote, in terms of article 62(ii) of the articles of association, notwithstanding the fact that the name of such a member appears on the register of members of the association on the date of filing of the required authorisation/resolution and continues to be so until the date of closure of the register of members prior to the election ;

(iv) in the case of partnership firm members with only one major partner, no authorisation will be necessary, as such a major partner will be deemed to be in the position of a sole proprietor for the purpose of voting only ; provided, however, a declaration has been already made about the age of the second minor partner in the membership application form itself, while membership application form was filed by the partnership firm.

If there is any constitutional defect in the concern of any member, the record of the association so maintained, shall be final for the decision of the chairman and no member shall raise any objection for his own fault for not correcting his/her record in the association."

In respect of this rule, there can be no doubt that there is no difficulty about proprietors, i.e., members, who are not partnership firms or companies. In the case of a partnership firm, all that is objected to is the issue of an authority letter by the association. We propose that annexure II of the articles of association should be treated as deleted and order accordingly and the unnecessary words in clause (b) should be deleted. This sub-clause will now read :

"(b) any one of the partners of a partnership firm member duly authorised by all other partners of such partnership firm to cast vote on behalf of the firms in writing."

As far as sub-clause (c) is concerned, there is no real objection to the same. It is retained. As far as sub-clause (i) of the proviso is concerned, it will remain as it is with the addition of the following words :

"the resolutions or letters of authority filed in accordance with this rule shall continue to operate in all subsequent annual general meetings unless varied by a specific resolution or letter of authority, as the case may be."

This change is in accordance with section 187 of the Companies Act, which provides that the resolution entitles the representative to vote. The section does not contemplate a fresh resolution being filed for every meeting. There is also sub-clause (iv) which deals with partnership firms where there is one major partner and a minor partner which we think may be retained as it is. But, as this rule visualises objections before the chairman, it is noted here for this purpose. We think that this amendment in the election rules will facilitate the voting by the company members and partnership members which is one of the main points of objection.

Turning now to the appointment of the chairman, we think that Mr. R. K. Kaul, Joint Registrar of this court, who has been appointed chairman of the committee can be nominated by us to be the chairman of the meeting. He will be given a fee of Rs. 2,500 and he will be assisted by Shri S. M. Saxena, superintendent, who has been associated in the past with the committee in the previous elections and such other members of the court staff as the company judge may nominate. The fees of these persons including Shri S. M. Saxena will be settled by the company judge. The payment will be made by the company.

Turning now to the question of objections to the register of members and voters list, as far as the register of members is concerned, the chairman may for the purpose of the meeting treat it as conclusive. Unless rectified by an order of the court, the register of members is effective, and will be used as such at the annual general meeting for the purposes of voting. However, as a variety of questions and problems may arise at the meeting when the voting takes place, we would like to set out a set of directions to meet some contingencies that may arise. We have kept in view the allegations in the main petition regarding the possibility of the elections being manipulated :—

(1) It is posssible that a person is entered in the register of members but is not entitled to be a member. This is a case of possible bogus voters. In such a case, the chairman may note the objection, but will allow the person to vote if the name is in the register of members and the voters list. The court will consider such objection later, if necessary.

(2) It is possible for a person's name to appear on the register of members and yet not be on the voters list. In such a case, the chairman will note the nature of the objection and allow the vote to be cast as an object ed vote. However, the objected vote will not be taken into consideration when result is declared, but should be kept separate. In case the objection regarding exclusion is upheld by the court, such vote may have to be in cluded in the recount, if any, is directed.

(3) There are disputes regarding the identity of a voter or of a representative which might arise. In such a case, the objection should be settled on the basis of the record, i.e., the signatures of the voter and those on the record of the company, or any other method which the chairman thinks appropriate to the situation.

(4) If there is a person claiming to be a member whose name is neither on the register of members nor on the voters list, such a person should not be permitted to vote, but it will be open to the chairman to record the person's objection, if he is so advised.

(5) These directions only relate to situations we can visualise and if there are others, the chairman may exercise his discretion.

Before parting with this appeal, it is useful to say that section 403 of the Companies Act visualises an interim order of the type that can be passed under section 402, with a view to bring to an end the oppression or mismanagement visualised by sections 397 and 398 of the Act. The holding of a future annual general meeting under the provisions of the Companies Act hardly qualifies to be classified as mismanagement or oppression under section 397 or 398 of the Act. So, it might be asked, how the court can pass orders altering the election rules or other procedure relating to the annual general meeting? In this case, it so happens that the type of oppression or mismanagement alleged in the petition is connected with the elections because the case of the petitioners is that fair and impartial elections are not held and the same people come back to power as members of the executive board from time to time. This may be the result of two possibilities. Either the elected persons are supported by the majority of the members, or there is something wrong in the election procedure. With a view to minimising the possibility of the elections being held in a manipulated manner or in some manner which prevents a fair and impartial result, we have been compelled to give the aforementioned directions. We hope that as a result of the changes, a fair and impartial election can be held.

In the result, we accept this appeal partly and direct the annual general meeting to be held within the shortest possible time. The annual general meeting in question relates to the period ending March 31, 1982, and consequently the accounts and reports for that period alone have to be placed before the meeting. The company court may as soon as these elections have been held give any directions that may be necessary for holding the annual general meeting for the subsequent periods, i.e., March 31, 1983, and March 31, 1984, as those periods have also expired in the meanwhile. In view of the nature of the case and the controversy as well as the result of the appeal, we allow the parties to bear their own costs.

[1951] 21 Comp Cas 239 (CAL.)

High Court of Calcutta

Commissioner of Excess Profits tax

v.

Jeewanlal Ltd.

Harries, C.J.,

and Banerjee, J.

Income-tax Reference No. 50 of 1950

January 17, 1951

Dr. S.K. Gupta, for the Commissioner.

JUDGMENT

Banerjee, J.—In this reference we are required to give our opinion on the following question:—

"Whether in the facts and circumstances of these cases the Income-tax Appellate Tribunal was right in holding that the directors of the respondent company had a controlling interest in it as contemplated by Section 2(21) of the Excess Profits Tax Act."

This reference has been made at the instance of the Commissioner of Excess Profits Tax, West Bengal, and arises out of five consolidated application made under the Excess Profits Tax Act covering the chargeable accounting periods ended 31st December, 1939, to 31st December, 1943. The point involved in them is the same.

The dispute before the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal was whether the respondent company was or was not a director-controlled company within the meaning of Section 2(21) of the Excess Profits Tax Act, 1940, during the chargeable accounting periods in question. The material portion of that section is as follows:—"Statutory percentage" means—(a) in relation to a business carried on by a body corporate (other than a company the directors whereof have a controlling interest therein), eight per cent, per annum; ....(c) in relation to a business to which sub-clause (a) does not apply, ten per cent. per annum.

If the respondent company is a director-controlled company, then on the increase in its average capital, the statutory percentage allowed under that section will be 10 per cent. and if not, it will be 8 per cent.

The respondent company was incorporated under the Indian Companies Act having a capital of Rs. 36 lacs divided into, 3,60,000 shares of Rs. 10 each. During the chargeable accounting periods in question, these shares were held as follows:—

Name of shareholder.	Number of shares held in C.A. Ps. ended 31-12-1939 and 31-12-1940.	Number of shares held in C.A. Ps. ended 31-12-1941, 31-12-1942 & 31-12-1943.
1. M/s. Aluminium Ltd.	3,59,790	3,59,600
MONTREAL.
2. Mr. L.G. Bash	10	...
3. “ P.J. Pathak	100	100
4. “ Manu Subhedar	100	100
5. “ H.K. Shah	...	100
6. “ Kenneth Hall	...	100

Article 90 of the Articles of Association of the respondent company is as follows:—

"90. Where a company registered under the provisions of the Indian Companies Act or not is a member of this company a person duly appointed to represent such company at a meeting of this company in accordance with the provisions of Section 80 of the Indian Companies Act, 1913, shall not be deemed to be a, proxy but shall be entitled to vote for such company on a show of hands and to exercise the same powers on behalf of the company which, he represents as if he were an individual member of this company, including the power to appoint a proxy whether special or general and the production at the meeting of a copy of such resolution appointing such representative duly signed by one director of such company and by the secretary (if any) and certified by them or him as being a true copy of the resolution shall on production at the meeting be accepted by this company as sufficient evidence of the validity of his appointment."

Article 105 empowers Aluminium, Ltd., to appoint three permanent directors on the board of directors. Article 113 provides that the nominee director appointed by Aluminium, Ltd., shall act as chairman of the meeting of the directors.

The first directors were Mr. Jeewanlal Motichand and Mr. Ramji Hansraj nominated by the respondent company, and Mr. L.G. Bash, Mr. C.G. Bowen and Mr. R.E. Powell nominated by Aluminium, Ltd.

The articles also provide that the directors nominated by Aluminium, Ltd., were entitled to retain office for life.

All the life directors except Mr. Bash ultimately retired. Mr. Bash continued in that office.

By several resolutions passed by the directors of Aluminium, Ltd., between 23rd May, 1935 and 20th October, 1942, it was resolved that Aluminium Ltd., "a corporation organised and existing under the Companies Act of the Dominion of Canada, hereby constitutes and appoints Mr. Lowson G. Bash its true and lawful agent and attorney-in-fact for it and in its name, place and stead to vote and/or from time to time to appoint special or general proxy to vote the said shares on behalf of Aluminium, Ltd., at any general or special meetings of the shareholders of Jeewanlal [1929], Ltd."

The resolutions recite Article 90 set out above. The "said shares" in, the resolutions refer to the shares owned by Aluminium, Ltd. and Jeewanlal [1929], Ltd. is the respondent company.

The Appellate Assistant Commissioner held that Mr. Bash functioned in the dual capacity of a director of the assessee company and as an agent of Aluminium, Ltd. and that he was controlling the assessee company by exercising the voting rights in respect of the shares held by the foreign company as agent of the said company and not as a director of the assessee company, and on that view, he, in agreement with the Income-tax Officer, treated the assessee as not a director-controlled company within the meaning of Section 2(21) of the Excess Profits Tax Act. From this order there was an appeal to the Income-tax Appellate Tribunal. The Tribunal held that in view of the power-of-attorney given to Mr. Bash by the Aluminium, Ltd., there was no room for doubt that the respondent company was a director-controlled company and set aside the order of the Appellate Assistant Commissioner.

The Commissioner of Excess Profits Tax thereupon asked the Tribunal to make a reference saying that the following question of law, among others, arose out of the order of the Tribunal:—

"Whether on the facts and in the circumstances of the case and on the construction of the power-of-attorney, the Tribunal was right in holding that the assessee was a company the directors whereof had a controlling interest therein."

The Tribunal accordingly has made the reference and has asked for our opinion on the question formulated by it as stated above. This is the question on which we have to express our opinion.

On behalf of the Commissioner, a point was taken by Dr. S.K. Gupta that Article 90 in the Articles of Association was ultra vires the Indian Companies Act and, therefore, was invalid, and consequently the power-of-attorney given to Mr. Bash was of no effect, Counsel referred to Section 80 of the Act, which is as follows:—

"A company which is a member of another company may, by resolution of the directors, authorise any of its officials or any other person to act as its representative that any meeting of that other company, and the person so authorised shall be entitled to exercise the same powers on behalf of the company which he represents as if he were an individual shareholder of that other company."

The "company" in the section means a company incorporated under the Indian Companies Act. Aluminium, Ltd., is not a Company incorporated under the Indian Companies Act. Applicant's counsel Dr. S.K. Gupta said that Section 80 of that Act had no application to the case of Aluminium, Ltd.

He also pointed out that apart from Section 80 there was no other provision in the Act which authorised Aluminium, Ltd., to give such a power-of-attorney and so the power given to Mr. Bash was invalid.

It is true that Section 80 does not apply and there is no provision in the Companies Act which expressly authorises' the company to give such a power-of-attorney. But that does not mean that Aluminium, Ltd., cannot give such a power-of-attorney. A corporation has no body nor a soul and must, ex necessitate rei, act through some human agency, If this is so, I do not see any reason why Aluminium Ltd., could not give such a power-of-attorney to Mr. Bash. Indeed the form of the power-of-attorney is taken from the Encyclopaedia of Forms edited by Dr. Underhill and is also given in Palmer's Company Precedents.

Both counsel agree that the English Companies Acts do not contain any express provision authorising an English company to execute a general power-of-attorney like the one under consideration. If a corporation has no authority to execute such a power, I do not see any meaning in the great authorities giving the forms, I have above referred to, as specimen forms.

But in the reference before us we are not called upon to decide the question raised by Dr. Gupta. We are of opinion that the applicant before us is not entitled to take the point as to the invalidity of the power. The point the applicant took before the Tribunal was not that the power was invalid but that on the true construction of the power given to Mr. Basil, he was not entitled to vote as a direction in respect of the shares held by Aluminium, Ltd. There the applicant argued that by virtue of the power given to Mr. Bash, he could only vote as an agent of Aluminium, Ltd., and, therefore, the respondent company was not a director-controlled company. It is clear, therefore, that the argument was based on the validity of the power.

But now Dr. Gupta seeks to argue that such a power is invalid. We are clearly of opinion that the point as to the invalidity of the power having not been taken before the Appellate Tribunal, it does not arise out of the order.

It must be remembered that the reference has been made under Section 66 of the Indian Income-tax Act. That section authorises the High Court to issue a mandamus to an inferior Court or a public officer to show cause why a particular act should not be done or forborne. One of the principles of mandamus is that the Court never issues a mandamus unless it is shown that it is incumbent on the inferior Court to do an act or forbear from doing an act. In this case how could it possibly be said that it was incumbent on the Tribunal to make a reference as to the invalidity of the power when that point was not raised before it? Further no mandamus is issued unless it is just so to do. As I have said before, the applicant before us proceeded before the Tribunal, the Appellate Assistant Commissioner, and the Income-tax Officer on the footing that the power was valid. How can the applicant now be allowed to argue his case on the footing that the power is invalid? It would be most unjust for this Court to allow such a point to be taken.

We have been referred to a recent decision of the Bombay High Court as an authority for the proposition that even if a point is not taken before the Tribunal, such a point can be said to arise out of the order of the Tribunal. We are unable to take that view. It has been clearly laid down in Abboy Chetty v. Commissioner of Income-tax, Madras, that a question of law can be said to arise out of an order of the Appellate Tribunal only if such order discloses that the question was raised before the Tribunal. A question of law not raised before the Appellate Tribunal cannot be said to arise out of its order even if on the facts of the case appearing from the order, the question fairly arises. We respectfully agree with the view expressed by the Madras High Court. The decision of the Madras High Court accords with the principle underlying a mandamus.

Dr. Gupta argued that the question framed by the Tribunal was in very wide terms and as such he was entitled to take the point before us. We do not agree. The matter surely does not rest on the words used by the Tribunal in framing the question but on the substance of the matter.

The only point, therefore, for our consideration is whether in view of the fact that Mr. Bash had a valid power-of-attorney from Aluminium, Ltd., to vote on the shares held by that company, the respondent company can be said to be a director-controlled company. The question depends on the meaning to be given to the words "controlling interest" in Section 2(21).

The control of a company resides in the voting power of its shareholders. "Controlling interest" means the extent to which the shareholders have the power of controlling the decisions of the company by vote. The fact that the beneficial interest in the shares is in a third party is immaterial. No distinction can be made between the case when the director-trustee has, and when he has not, a beneficial interest in the shares. This is the decision of the House of Lords in Inland Revenue Commissioners v. J Bibby & sons Ltd. In this case the issued capital of the company concerned consisted of 750,000 £ 1 preference shares and 500,000 £ 1 ordinary shares. The preference shares carried no votes. Each ordinary share carried one vote on a poll. There were eight directors who were respectively beneficial owners and registered holders of ordinary shares which amounted to a total of 209,332 shares. Three of the directors were registered as joint holders of 57,500 other ordinary shares which they held as trustees of their sister's marriage settlement The company employed in its business in the chargeable accounting period from 1st April, 1939, to 31st December, 1939, an average amount of capital greater than the average amount in the standard period and was, therefore, by virtue of the Finance (No. 2) Act, 1939, Section 13(3), entitled to have its standard profits increased by a percentage of the increase in its capital. Sub-section (9) of the same section provided that if the directors have a "controlling interest" in the company, the standard profits might be increased by 10 per cent. but where they had no such interest, only by 8 per cent. The question for the determination of the Court was, therefore, whether the 57,500 shares ought to be added to the 209,332 shares for the purpose of determining whether the directors had a controlling interest in the respondent company.

The House of Lords, affirming the decision of the Court of Appeal, held that on a true construction, the words "controlling interest" did not refer to the directors' beneficial interest in the company, but to the power of controlling by votes the decisions binding on the company in the shape of resolutions passed at a general meeting. The fact that a vote-carrying share was vested in a director as trustee was, therefore, as far as the company was concerned, immaterial. Accordingly, the directors were entitled to include the shares held by them as trustees in computing the total number of the shares held by them for the purpose of ascertaining whether they had a controlling interest in the company.

Again, the expression "controlling interest" has been explained by the House of Lords in F.A. Clark & Sons, Ltd. v. Commissioners of Inland Revenue. Viscount Simon, L. C, made the following observations:—

"The case turns on the meaning of the words 'controlling interest,' in the context in which they are used.

The appellant argues that, in order that one company should have a controlling interest in another, it must be the beneficial owner of a requisite number of shares in that other company, either registered in its own name or in the name of its nominees; and that if company No. 1 ownes all the shares in company No. 2, which in turn owns all the shares in company No. 3, company No. 1 has no interest, controlling or otherwise, in company No, 3.

It is true that in such circumstances company No. 1 ownes none of the assets of company No. 2, and a fortiori owns none of the assets of company No. 3, and in that sense neither owns, nor has an interest in company No. 3. But that is to treat the phrase ' controlling interest' as capable of connoting only a proprietary right, that is, an interest in the nature of ownership. The word 'interest', however, as pointed out by Lawrence, J., is a word of wide connotation and I think the conception of 'controlling interest' may well cover the relationship of one company towards another, the requisite majority of whose shares are, as regards their voting power, subject, whether directly or indirectly, to the will and ordering of the first-mentioned company. If, for example the appellant company owns one-third of the shares in company X, and the remaining two-thirds are owned by company Y, the appellant company will none the less have a controlling interest in company X if it owns enough shares in company Y to control the latter.

In my opinion this is the meaning of the word 'interest' in the enactment under consideration, and where one company stands in such a relationship to another, the former can properly be said to have a controlling interest in the latter. This view appears to me to agree with the object of the enactment as it appears on the face of the Act.

I find it impossible to adopt the view that a person who (by having the requisite voting power in a company subject to his will and ordering) can make the ultimate decision as to where and how the business of the company shall be carried on, and who thus has in fact control of the company's affairs, is a person of whom it can be said that he has not in this connection got a controlling interest in the company."

In Commissioner of Income-tax, Bombay v. Bipin Silk Mills Ltd., the same view was taken. In that case out of the 100 shares of the assessee company 43 were held by the directors in their own right. Twenty shares were held by five persons as trustees, one of them A being also a director. It was argued that interest contemplated by Section 2(21)(a) of the Excess Profits Tax Act, 1940, was beneficial interest and, therefore, the trustees could not be said to have an interest in the shares within the meaning of that section. The High Court (Stone, C.J., and Kania, J.) held that the interest of the trustees in the shares was interest within the meaning of the section and that as under the trust deed and also the Articles of Association of the company the trustee A had the right to vote as he pleased at a meeting as between the company and the shareholders, he had a controlling interest in respect of the 20 shares, and the company, therefore, was a director-controlled company within the meaning of the section.

Dr. Gupta referred us to a later Bombay case, New Shorrock Spinning and Manufacturing Co., Ltd. v. Commissioner of Income-tax, Bombay North, in which a contrary view was taken. In this case the High Court (Chagla, C.J., and Tendolkar, J.) has taken the view that if the directors can influence the ultimate decision of the company, they have a controlling interest. But the ultimate control must be brought about by directors having a majority of votes on the register and not by any extraneous circumstances which may result in the majority against them being reduced to a minority. With respect, we are unable to agree with the view expressed in the later Bombay case. It is to be noted that this case does not make any reference to the earlier Bombay case and it does not appear that their Lordships' attention was drawn to that case.

The matterial words in the section which is now under consideration are "directors whereof have a controlling interest therein." The section does not make any reference to any register. There is nothing in the section to show that such control must be brought about by directors having a majority of votes on the register.

It is unnecessary to discuss other cases which were cited by counsel because in my humble opinion the two decisions of the House of Lords and the earlier Bombay case very clearly decide the meaning of the expression "controlling interest" in the section under consideration.

It is clear, therefore, on the principal stated above that the respondent is a director-controlled company. It is quite true that Mr. Bash had no beneficial interest in the shares which were owned by Aluminium, Ltd., but by virtue of the power he held from that company, he, a director, was in a position to control the decision of the respondent company by votes at a general meeting.

The applicant has referred us to Article 88 to show where the voting right was. That article is fatal to the applicant's case because if each shareholder is taken to have a vote, it is clear that of the six shareholders the directors have the majority votes.

The answer to the question asked, therefore, must be in the affirmative.

The applicant must pay the costs of the reference.

Harries, C.J.—I agree.

[1970] 40 COMP. CAS. 819 (GUJ)

HIGH COURT OF GUJARAT

Maneckchowk & Ahmedabad Mfg. Co. Ltd., In re

D.A. DESAI, J.

Company Application No. 23 of 1968 with Company Petition No. 8 of 1969

DECEMBER: 10, 1969 

JUDGMENT

Messrs. Indequip Limited (hereinafter referred to as the petitioner) has filed this petition under section 391(2) of the Companies Act, 1956, for sanctioning, a scheme of compromise and arrangement between the creditors and members of Maneckchowk & Ahmedabad Manufacturing Company Limited (hereinafter referred to as the company) and the compromise proposed by the company in Company Application No. 23 of 1968 and approved by the creditors and members of the company. The company was incorporated in the year 1892 and it was manufacturing cotton yarn and cotton textiles. For that purpose the company had set up textile mills divided into two units described as Unit No. I and Unit No. II. Since 1913 one Hiralal Trikamlal was its managing agent. Hiralal Trikamlal has three sons, Manubhai, Chandulal and Linubhai, and two daughters, Shardaben and Shantaben, all of whom are very much concerned in this petition. In 1957 the firm of Hiralal Trikamlal & Sons was appointed as managing agents of the company. One Gopaldas P. Parikh was appointed as a director of the company in the year 1959. Up to 1st January, 1966, Manubhai Hiralal and Chandulal Hiralal as partners of Hiralal Trikamlal & Sons were in active management of the affairs of the company and since that date Linubhai Hiralal along with Gopaldas P Parikh took over the active management of the company. It appears that since 1962 the company was in financial doldrums and its losses were mounting up from year to year. The workers of the company went on strike on 2nd April, 1968, as their wages for nearly two months were in arrears with the result that the company was obliged to close the mills. The first petition praying for winding up the company was filed in April, 1968. The immovable properties of the company were attached by the Collector at the instance of the Regional Provident Fund Commissioner and Employees' State Insurance Corporation. The company filed Company Application No. 23 of 1968 on 27th June, 1968, under section 391(1) seeking directions for convening the meeting of its creditors and members for considering and if thought fit for approving with or without modifications a scheme of compromise and arrangement proposed by it. Before the court gave directions on the aforementioned application, one Chandulal Hiralal as power of attorney holder of Shardaben and Shantaben and others filed Company Petition No.24 of 1968 on 4th July, 1968, praying for an order for winding up the company. Two other petitions for the same reliefs were fried on 12th July, 1968, being Company Petition No. 28 of 1968 by Ambica Dyes and Chemicals and Company Petition No. 29 of 1968 by Popular Dyestuffs and Chemical Company. On the application filed by the company under section 391(1), the court gave direction on 4th July, 1968, for convening meetings. The petitioners in Company Petition No. 24 of 1968 filed Company Petition No. 35 of 1968 on 29th July, 1968, for appointment of a provisional liquidator which petition was granted by the court and the official liquidator attached to this court was appointed as provisional liquidator of the company and since then the provisional liquidator is in possession of the assets of the company. The meetings of the unsecured creditors and members of the company were held on 5th and 6th October, 1968, and final meeting of the secured creditors was held on 9th December, 1968. The chairman appointed by the court to preside over these meetings submitted his report on 16th December, 1968. Thereafter the petitioner applied for and obtained leave in Company Application No. 1 of 1969 on 13th January, 1969, to file substantive petition under section 391(2) of the Companies Act for sanctioning the scheme of compromise and arrangement as approved by the creditors and members as provided by rule 79 of the Companies (Court) Rules, 1959, because the company as represented by the provisional liquidator was not willing to file the substantive petition. The court granted leave to file this substantive petition, whereupon the petitioner filed substantive petition on 1st February, 1969. The petition was admitted on 3rd February, 1969. The court gave directions for advertising the petition in various newspapers and a notice was also directed to be issued to the Central Government as envisaged by section 394-A of the Companies Act. In the advertisement issued in the newspapers it was stated that the court would take up this petition for hearing on 8th March, 1969, and anyone interested in the company may come and appear either to oppose or support the petition. The hearing of the petition had to be adjourned from time to time as the petitioner had not submitted the latest financial position of the company as required by the proviso to section 391(2) of the Companies Act. The petitioner experienced difficulty in disclosing the latest financial position of the company because the provisional liquidator was in charge of the company and it appears that the books of accounts of the company were not written, as also the petitioner being creditor had no access to the books of accounts of the company. On a judge's summons taken out by the petitioner, the court gave certain directions and appointed auditors to prepare the statement showing the latest financial position of the company. After the auditors submitted detailed reports disclosing the latest financial position of the company the petition was set down for hearing.

At the hearing of the petition Mr. R.N. Oza appeared for the Union Bank of India, a secured creditor of the company, Mr. B. R. Shah appeared for the Employees' State Insurance Corporation, Mr. S. N. Shelat appeared for two creditors, namely, M/s. Atul Cotton Traders and M/s. Amarshi Damodar, Mr. C. C. Gandhi appeared for Indian Electro Chemical Limited, Mr. R.M. Gandhi and Mr. R.P. Bhatt appeared for the Regional Provident Fund Commissioner and Mr. S. B. Majumdar appeared for the Textile Labour Association and they all supported the scheme. Mr. S. B. Vakil appeared for the creditors who had filed Company Petition No. 24 of 1968 for winding up the company and for Messrs. East India Company instructed by Messrs. Ambubhai Divanji and for Asia Electric India Private Limited and opposed the scheme. Mr. B.J. Shelat appeared for Ambica Chemicals and Dyes, petitioner in Petition No. 28 of 1968 and Popular Dyestuffs and Chemicals, petitioner in Company Petition No. 29 of 1968—both of whom are the creditors of the company—and opposed the scheme. Mr. L.T. Shah appeared for the provisional liquidator who submitted to the orders of the court.

The scheme as finally submitted to the court for its sanction envisages reorganization of the share capital of the company which includes reduction of the share capital by reducing the face value of the ordinary share of Rs. 1000 fully paid to Rs. 250 fully paid, and preference share of Rs. 100 fully paid to Rs. 25 fully paid. The scheme also envisages increase of share capital by issue of shares to the unsecured creditors of the company excluding the workers to the tune of 50% of the verified claim of each unsecured creditor. The scheme envisages dismantling and scrapping of Unit No. II of the mills of the company and the sale proceeds to be utilised towards the payment to the secured creditors, namely, Union Bank of India and the Regional Provident Fund Commissioner. After Unit No. II is scrapped, the open land is to be let out to the intending lessee which will fetch a steady income. It is proposed to restart Unit No. I of the mills of the company. The secured creditors are to be paid in full in the manner set out in the scheme. The balance of 50 per cent, of the claim of the unsecured creditors are to be frozen for a period of two years and thereafter the said claims are to be satisfied as provided in the scheme. The dues of the workers are to be paid by certain stages. Some of the detailed features of the scheme will be examined while considering the objections raised by those contesting the scheme.

Before the court accords its sanction to any scheme of compromise and arrangement, it would normally expect to be satisfied about three important matters, namely, (i) whether the statutory provisions have been complied with or not; (ii) whether the class or classes have been fairly represented; and (iii) whether the arrangement is such as a man of business would reasonably approve. As the scheme was very vehemently contested and a number of contentions have been raised by Mr. Vakil, these three aspects have been vigorously debated and they will be considered while considering those objections.

Mr. S. B. Vakil, who was the principal contender at the hearing of this petition, contested the scheme on the following grounds:

(1) The petitioner has not satisfied the requirement contained in the proviso to section 391(2) by not making necessary disclosures at the proper time and it being a condition precedent to the court's exercise of jurisdiction under section 391(2), the present petition must fail.

(2) The proposed scheme is not a proper alternative to an order for winding up the company in view of the fact that the company is guilty of giving a number of fraudulent preferences in favour of the Union Bank of India, the Regional Provident Fund Commissioner and five other creditors which can only be investigated and avoided in winding up proceedings.

(3) The proposed scheme envisages scrapping of Unit No. II and part of Unit No, I of the mills of the company and, in the absence of a permission for scrapping a textile mill, it would be illegal to sanction the scheme.

(4) The proposed scheme envisages reorganisation of the share capital of the company, including reduction and increase of share capital, which cannot be done without going through the whole gamut of the procedure prescribed for the same and as it is an inseverable part of the scheme, it would be futile to sanction the remainder of the scheme in its mutilated form.

(5) In the absence of proper directions for convening separate meetings of different classes of creditors and members of the company, appropriate meetings of distinct classes of members and creditors were not held and therefore, it is not possible to say that the proposed scheme has been approved by requisite majority of different classes of creditors and members.

(6) A proper statement as required by section 893(1) and as directed by the court's order, dated 26th June, 1968, in Company Application No. 23 of 1968 was not sent along with the notice convening the meetings of members and creditors of the company.

(7) The meetings of creditors and members were conducted in an irregular manner and, therefore, the votes recorded at such meetings cannot be relied upon to show that the scheme has been approved by the requisite majority of creditors and members.

(8) Even if it be held that the meetings were properly conducted, in fact the scheme is not approved by a statutory majority of creditors and members; but assuming that the other view is possible, the court on the analysis of votes recorded at the meeting should not exercise its discretion in favour of the scheme so as to impose it on the dissenting members and creditors.

(9) The scheme is not commercially and economically viable or feasible and is in fact unfair and unreasonable; the court should not exercise its discretion in favour of such a scheme. These grounds will be dealt with in the order in which they are set out.

Re. Ground No. 1. Section 391(1) and (2) reads as under:

"391. Power to compromise or make arrangements with creditors and members.—(1) Where a compromise or arrangement is proposed—

(a) between a company and its creditors or any class of them; or

(b) between a company and its members or any class of them;

the court may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the court directs.

(2) If a majority in number representing three-fourths in value of the creditors, or class of creditors or members, or class of members, as the case may be, present and voting either in person or, where proxies are allowed under the rules made under section 643, by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or, in the case of a company which is being wound up, on the liquidator and contributories of the company.

Provided that no order sanctioning any compromise or arrangement shall be made by the court unless the court is satisfied that the company or any other person by whom an application has been made under sub-section (1), has disclosed to the court, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251, and the like."

The contention is that before the court can proceed to consider whether the scheme of compromise and arrangement should be sanctioned or not, the party sponsoring the scheme must disclose to the court by an affidavit or otherwise all material facts relating to the company, such as, the latest financial position of the company, latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251, and the like. It is undoubtedly true that before the court can accord sanction to a proposed scheme of compromise and arrangement, between the company and its creditors or any class of them; or between the company and its members or any class of them, approved by a majority in number representing three-fourths in value of the creditors or class of creditors or members or class of members, as the case may be, present and voting either in person or, where the proxies are allowed, by proxy, the court must be satisfied amongst other things that company or the sponsor of the scheme has disclosed all material facts relating to the company. The contention is that this disclosure should be made at the time when the petition is filed under section 391(1) and as that has not been done, the court should ignore whatever is disclosed after the petition for sanctioning the scheme is filed under section 392(2). Sections 391(1) and 391(2) refer to two distinct stages. Whenever a compromise or arrangement is proposed between a company and its creditors or any class of them or between a company and its members or any class of them, the court on the application of the company or any creditor or member of the company or in the case of the company which is being wound up, of the liquidator, order a meeting of the creditors or members or any class of them as the case may be. Such an application shall be moved by judge's summons supported by affidavit to which the proposed scheme of compromise and arrangement should be annexed. The judge's summons can be moved ex pate unless the petition is by some one other than the company in which case, a notice to the company has to be served. The court may give various directions at the hearing of this summons set out in rule 69. Once these directions are given, application under section 391(1) would be disposed of. Nothing further is required to be done until after the meetings directed to be convened are held and the chairman submits his report, whereafter a substantive petition for sanctioning the scheme can be filed as envisaged by section 391(2) and rule 79. Before the court can accord sanction to the scheme, the petitioner or the company must disclose latest financial position of the company and the latest auditor's report as required by the proviso to sub-section (2). Proviso is annexed to sub-section (2) which envisages a distinct stage from sub-section (1). The submission is that disclosures as required to be made by the proviso should be made at the stage of seeking directions under sub-section (1) of section 391. The submission would stand negatived apart from anything else by the very language in which the proviso is cast and its' location in the scheme of section 391. Firstly, the proviso is engrafted to sub-section (2) which envisages a distinct stage from sub-section (1); secondly, the opening words of the proviso: "provided no order sanctioning any compromise or arrangement shall be made by the court unless .........." would manifestly indicate the intention of the legislature that the disclosure is to be made at the stage when the court is called upon to sanction the scheme. If the submission had any merit in it, it was perfectly open to the legislature to engraft the proviso to subsection (1) and in that event, the language would be "provided no direction shall be given for convening meeting unless". Undoubtedly that has not been done. If sub-sections (1) and (2) of section 391 envisage two distinct stages, namely, (i) giving direction for convening the meeting for considering the proposed scheme and (ii) the independent stage when the court would be called upon to consider whether the scheme should or should not be sanctioned and if the disclosure is to be made before the court at the time when the court is called upon to sanction the scheme, it is not possible to accept the submission that the disclosure ought to be made at the initial stage when an application is made under section 391(1).

Mr. Vakil however urged that disclosure as envisaged by the proviso has to be made either by the company or by any other person by whom application has been made under sub-section (1) which gives strong indication that the disclosure ought to be made at the initial stage when an application is filed under section 391(1). But as the summons under subsection (1) is to be moved ex parte, objection can be taken about the non-disclosure at the initial stage only at the time when the court proceeds to accord sanction to the scheme and, therefore, the proviso is engrafted to sub-section (2). It was urged that an application under section 391(1) can be made by a creditor or member who may not be in possession of the latest financial position of the company a notice to the company is made obligatory under rule 68. This notice to the company is made obligatory because only the company would be able to disclose the latest financial position. It is no doubt true that a compromise or arrangement can be proposed by either a creditor or a member of the company but it is essentially a compromise or arrangement between the company and its creditors or between the company and its members and if the application is made by some one other than the company it was considered desirable that a notice should be given to the company before direction for convening the meetings are given. Merely because a notice is to be given to the company under rule 68 before directions are given and because the advocate of the company has to file the form of advertisement and statement accompanying the notice as required by Form No. 35 in which order convening the meetings has to be made, it cannot be said that the disclosures ought to be made at that stage. Mr. Vakil however urged that in this application under section 391(1), judge's summons for seeking directions for convening the meeting to consider the proposed scheme of compromise and arrangement would be moved ex parte and the court would not be able to give proper directions in the absence of material disclosures as envisaged by the proviso and, therefore, even though the language of the proviso and its location may apparently indicate that the disclosure has to be made at the stage when the court is called upon to consider the scheme, for very good reasons, the court should interpret the proviso to mean that the disclosure should and ought to be made at the initial stage. It was urged that when an ex parte judge's summons is moved under sub-section (1) and the court is required to give direction for convening the meeting, the court has to determine, amongst other things, class or classes of creditors and class or classes of members whose meetings have to be convened and has to determine the value of the creditors and/or members or creditors or members of any class as the case may be, and the court would not be able to do it unless the latest financial position including the auditor's report is disclosed to the court. It was also urged that in order to enable the court to give proper statement under section 393(1)(a) which must accompany the notice convening the meeting so as to give those who are to attend the meeting, the necessary information to enable them to cast their votes intelligently, it is absolutely necessary that the aforementioned disclosures should be made at that stage. It was very vehemently urged that the sanction of the court to the scheme is of secondary importance, its approval by the creditors and members whose vital interest in the company are really at stake is of primary importance; and unless the scheme is properly considered by different classes of creditors and members, it cannot be taken up for consideration by the court. Therefore, the distinct and homogeneous class of creditors and members should be properly drawn up while giving directions for convening meetings, and it would be impossible to do so in the absence of disclosure about the latest financial position of the company, at that stage. It was further urged that material facts which ought to be disclosed as required by the proviso would include all the relevant facts which would go to show that the company is liable to be wound up and that the compromise and arrangement is fair and reasonable and is not mala fide and that it would be a proper alternative to the winding up of the company the material facts required to be disclosed would also include the information which would help the court in determining the class of creditors or members whose separate meetings should be convened and their values to be properly determined.

Affidavit in support of the judge's summons moved under section 391(1) has to be drawn up in Form No. 34 —a perusal of which shows that in the affidavit the party seeking the directions of the court which would of necessity be either the company or its creditor or member, must set out the circumstances that have necessitated the proposed compromise and arrangement, the object sought to be achieved by it, the terms of the compromise and arrangement, the effect if any of the compromise and arrangement on the material interests of the directors managing director, managing agent, secretaries and treasurers or manager of the company and when the compromise and arrangement affects the interest of the debenture-holders its effect on the material interests of the trustees of the debenture trust deed. It must further be disclosed in affidavit that classes of creditors or members with whom the compromise or arrangement is to be made and if the compromise and arrangement is between the company and its members it should further be stated whether any creditor or class of creditors are likely to be affected by it. The affidavit must show that different kinds of meetings of different classes of persons are required to be convened. It is obligatory upon the applicant under section 391(1) to set out the aforementioned facts in the affidavit in support of the judge's summons. The aforementioned facts, if properly disclosed, would enable the court to give proper directions as envisaged by rule 69 and the absence of the latest financial position of the company or the latest auditor's reports would not be handicap in the court giving proper directions. In my opinion, the details required to be mentioned in the affidavit have been so prescribed to enable the court to give proper directions and no disclosures are required to be made as required by the proviso at that stage. The form in which the affidavit is required to be made further strengthens the conclusion that the proviso does not come into play when the court deals with the petition under section 391(1) but it comes into play only at the later stage.

It was however urged that if the court is going to rely on the affidavit in support of the judge's summons in Company Application No. 23 of 1968, for reaching a conclusion that relevant information was disclosed in the affidavit, it would be necessary to consider in detail the affidavit of Mr. B. I. Patel, the constituted attorney of the company who filed his affidavit in support of the judge's summons. It was urged that the affidavit of Mr. Patel did not disclose the fact that the company had suffered consent decrees and charges were created on the properties of the company indicating that the company was guilty of giving fraudulent preferences in favour of the creditors in whom the then directors were vitally interested. It was urged that this affidavit does not disclose the fact that various petitions praying for winding up the company were presented and were pending; nor the fact that the company had executed two mortgages, one in favour of the Union Bank of India in January 1968 and the other in favour of the Regional Provident Fund Commissioner in May 1968; and that the company had incurred losses in the last year to the tune of Rs. 45 lakhs and odd. The affidavit of Mr. Patel is in the prescribed form and it sets out various details necessary for giving proper directions. It may be mentioned that Mr. Patel had annexed the latest balance-sheet of the company upto 31st March, 1967, to the affidavit. He had also stated the dues of the managing agents, Indequip group of companies and dues of the managing director as well as the members of his family and the effect of the scheme on their claims. Therefore, whatever was necessary at that stage was disclosed in the affidavit and nothing further was required to be done at that stage.

Mr. Vakil further urged that the proposed scheme is to be considered by the members and creditors of the company and when they are considering the scheme, they should ordinarily have all the relevant information about the financial position of the company so that they can bring to bear upon the subject their independent (intelligent) commercial judgment as to whether the scheme should or should not be approved. If the matter is viewed from this angle, urged Mr. Vakil, it would indicate that disclosure should be made at the stage when the application is filed under section 391(1) because that information would be available to the creditors and members in their meeting. It was contended that if the creditors and members are called upon to vote upon the scheme without supplying them necesssary information which would help them in judging the scheme in its proper perspective, their approval of the scheme in sheer ignorance of the relevant facts would be of no avail. The approval of the scheme by the creditors and members must be after bringing to bear upon the subject their intelligent judgment based upon full disclosure as to the existing stage of affairs of the company and its future which is sought to be assured by the proposed scheme of compromise and arrangement. Mr. Vakil referred to In re Travancore National & Quilon Bank Ltd. An objection was raised before the court considerig the scheme that as the scheme was not based upon correct information as to the affarirs of the company and has not had the intelligent support of the body of creditors who are supposed to have given assent to the scheme and there is no guarantee that the realizations therein promised would be realised. Referring to two English cases it has been observed that any scheme which is approved must prima facie appear to be based on correct information and data. However, having thus observed the court further proceeded to observe that this does not mean that the application for sanctioning the scheme should be rejected on the ground that sufficient information was not supplied at the meeting of the creditors when they approved the scheme. This would not bear out the submission that the disclosure must be made at the initial stage. Reference was also made to In re Calcutta Industrial Bank Ltd. wherein an objection was taken that the books of accounts of the company were not available at the meeting of the creditors and that the creditors were prevented from putting questions. Even though these grounds were considered, it may be stated that on the facts found in the Chariman's report no weight was attached to the aforementioned objections. Reference was also made to In re Bharati Central Bank Ltd. The question raised before the court was whether the creditors and members who had unanimously approved the scheme had full information of all the aspects and were acting honestly and in good faith at the meeting. After considering the evidence in the case it was observed that it was impossible to say that the creditors had full and fair knowledge of all the relevant facts on which they could come to an intelligent decision or that they had applied their independent mind to the scheme. In my opinion, no proposition of law can be deduced from the aforementioned case as suggested by Mr. Vakil that the disclosure ought to be made at the initial stage. It is always a question of fact whether the creditors and members did consider the scheme in the various meetings after getting the relevant information which would help in judging the scheme on its merits. But it cannot be said that as discloures were not made at the initial stage when the directions were given by the court the requirements of the proviso were not complied with.

Looking to the language of the proviso especially its opening words:

"Provided that no order sanctioning any compromise or arrangement shall be made..." and the location of the proviso in the scheme of section 391 and especially the fact that section 391(1) and section 391(2) envisage two distinct and independent stages when the court is called upon to apply its mind to the proposed scheme of compromise and arrangement and the contents of the affidavit required to be drawn up in prescribed form in support of the judge's summons under section 391(1) it is not possible to accept the submission of Mr. Vakil that disclosures as required by the proviso shonld be made at the intial stage when the application is made under section 391(1). In my judgment, these disclosures are required to be made when a petition is filed under section 391(2) for sanctioning the scheme and must be available when the court proceeds to examine the scheme to find out whether sanction should be accorded to it or not.

As a second limb of the argument, it was contended that even if it be held that disclosures as required by the proviso are to be made at the stage when the court is considering the petition for sanctioning the scheme, in fact, no disclosures have been made in this case and therefore, the court should not accord sanction to the scheme. It was argued that the proviso being couched in the negative form is of a mandatory character and disclosures being a condition precedent to the court's exercise of jurisdiction for sanctioning the scheme, unless condition precedent is fully satisfied, the court will have no jurisdiction to sanction the scheme. It is true that the proviso is cast in the negative form. It is equally true that the court is precluded from according sanction to the scheme unless the disclosure as required by the proviso are made. As the proviso is prohibitory in character, it is not possible to treat it as merely permissive (vide High Commissioner for India and the High Commissioner for Pakistan v. I.M. Lall ) The proviso was introduced in the year 1965 and as it is prohibitory in character and provides condition precedent to the court's exercise of jurisdiction for sanctioning the scheme it definitely appears to be mandatory in character and must be strictly complied with. The question is whether in fact it has been complied with or not. When the present petition was filed, the company was in charge of the provisional liquidator. The petitioner being a creditor could not produce documents showing latest financial position of the company. In order to make available latest financial position of the company and latest auditor's report, the petitioners took out a judge's summons in Company Application No. 11 of 1969 for a direction that the provisional liquidator who is in charge of the company should supply the latest financial position and all material facts pertaining to the said company. The court gave certain directions as a result of which Mahendra M. Patel & Company, Chartered Accountants, were appointed as auditors to prepare the latest financial position of the company and to submit the auditor's report. It transpired that the books of accounts for certain period were not written and under the supervision of the provisional liquidator, the ex-directors of the company were permitted to complete the books of accounts. Thereafter the chartered accountants prepared the latest balance-sheet upto 29th July, 1968. Company Application No. 23 of 1968, was filed under section 391(1) on 27th June, 1968. The mills of the company are closed from 2nd April, 1968. Therefore, when the books of accounts till 29th July, 1968, are prepared and auditors have audited the books, it cannot be gainsaid that the latest financial position and latest auditor's reports have been disclosed by the petitioner. The requirement of the proviso has certainly been complied with. But Mr. Vakil urged that the auditors did not get clarification on a number of points set out in the report under the heading "Notes forming part of the accounts for the period 1st April, 1968, to 29th July, 1968." It was urged that, unless these points have been clarified, it cannot be said that the latest financial position of the company is made available to the court. It was also contended that looking to what the auditors have stated in the report, the latest financial position of the company is not capable of being ascertained at the present stage. It was also contended that the dues of certain creditors have not been properly verified and there is difference in the trial balance prepared by the auditors to the tune of Rs. 18,214 which the auditors have debited to the suspense account. It is undoubtedly true that the auditors have set out various queries in the report, but these queries did not in any manner come in the way of proper appreciation of the latest financial position of the company as disclosed in their reports. There may be some difference here or there but that is not material because the court is not examining the accounts of the company or any allegation of embezzlement or defalcation. The court at this stage is concerned with the financial position of the company in its broad outlines. In fact, the court would primarily be concerned with the assets and liabilities of the company and a few minor details here or there would not be of any consequence while considering the scheme of compromise and arrangement. These details may. be of importance when the claim of each creditor qua the company is being considered; but while considering the scheme of compromise and arrangement, the court, more particularly, is concerned with the assets and liabilities of the company and they are admittedly set out in the reports submitted by the auditors. It may be mentioned that the petitioner has filed the affidavit of Gopaldas P. Parikh at page 506 of the record to which is annexed the clarifications submitted by the directors to the queries raised by the auditors. However, it is not necessary to go into them at this stage. Suffice it to say that proper disclosures in their broad outlines have been made so as to comply with the proviso to section 391(2). In my judgment, therefore, the first ground of attack is without merits and must be negatived.

Reg. Ground No. 2.—Second ground of attack was that the proposed scheme is not a proper alternative to an order for winding up the company in view of the fact that the company is guilty of giving a number of fraudulent preferences in favour of the Union Bank of India, the Regional Provident Fund Commissioner and five other creditors, namely, (1) Indian Electro Chemicals Ltd., (2) Dyestuffs and Chemicals Private Ltd., (3) Indequip Ltd., (4) Amarshi Damodar, and (5) Messrs. Atul Cotton Traders, which can only be investigated and avoided in winding up proceedings. The contention is that the proposed scheme was put forth by the directors of the company in order to shield themselves and to prevent investigation of their misdeeds, misfeasance and non-feasance during their management of the affairs of the company. It was very vehemently contended that if the petition for sanctioning the scheme is rejected, the only alternative open to the court would be to wind up the company. If the company is wound up the official liquidator would be able to investigate the management carried on by the directors of the company. The official liquidator would also be able to avoid fraudulent preference alleged to have been granted by the directors of the company in favour of their chosen creditors as also in favour of the Union Bank of India and the Regional Provident Fund Commissioner and that neither this investigation could be made nor fraudulent preferences could be avoided if the scheme is sanctioned. In other words, it was urged that sanctioning of the scheme would provide a shield to the ex-directors of the company to cover up their misdeeds which brought the company to a state of complete ruination. The charge is rather very serious and if prima facie it could have been shown that the ex-directors were guilty of giving fraudulent preferences to their chosen creditors and further if these fraudulent preferences could not have been avoided except on the pain of winding up the company, I would have experienced considerable hesitation in further considering the scheme.

The company was indebted to the tune of Rs. 2,63,129.92 to Indian Electro Chemicals Ltd., Rs. 5,79,650 to Dyestuffs and Chemicals Private Ltd., Rs. 33,14,783 to Indequip Ltd., Rs. 3,38,267.96 to Messrs. Amarshi Damodar and Rs. l,86,225.50 to Messrs. Atul Cotton Traders. Gopaldas P. Parikh is vitally interested in the first mentioned three creditors and one Manubhai Amarshi, who carries on business under the name and style of Messrs. Amarshi Damodar and Messrs. Atul Cotton Traders is a close friend of Gopaldas P. Parikh. Manubhai Amarshi has supplied cotton to the company, Indian Electro Chemicals Ltd., and Dyestuffs and Chemicals Private Ltd. had supplied goods and stores to the company; Indequip Ltd. had not only supplied goods and stores but also extended cash loans from its sharafi accounts to the company. Gopaldas P. Parikh holds large blocks of shares in the Indequip Ltd. and is virtually the owner of the Indian Electro Chemicals Ltd. and Dyestuffs and Chemicals Private Ltd. Thus there is no room for doubt that Gopaldas Parikh was vitally interested in the aforementioned five creditors. The first petition for an order for winding up the company was filed in the year 1967 being Company Petition No. 27 of 1967. That was withdrawn on 24th April, 1968. By that time, another petition filed for winding up the company was pending. During the pendency of this petition, it appears that the aforementioned five creditors filed suits against the company which was then being managed by Anil Parikh, son of Gopaldas P. Parikh, Surotam Hathising and Linubhai Banker. Undoubtedly, Gopaldas P. Parikh was the boss of the whole show. Indian Electro Chemicals Ltd. filed Summary Suit No. 789 of 1968. Dyestuffs and Chemicals Private Ltd. filed Summary Suit No. 790 of 1968. Indequip Ltd. filed Summary Suit No. 791 of 1968, Messrs. Amarshi Damodar filed Summary Suit No. 768 of 1968 and Messrs. Atul Cotton Traders filed Summary Suit No. 977. 1968 against the company for recovering their respective claims as set out above. All these suits were filed on 15th April, 1968. On the next day, the board of directors of the company resolved to suffer consent decrees in all these suits. The company suffered consent decrees for the full amounts claimed by each creditor. So far no serious objection could have been taken; but the company over and above suffering consent decrees without investigating the exact amount payable to each of the creditors, the directors went further and created charges in favour of each of the creditors for its respective claims over the movable and immovable properties of the company. The suits were filed by Mr. B. A. Kayastha, who, it was urged, is an associate of Messrs I. M. Nanavati & Company Associates and Mr. I. M. Nanavati has been throughout appearing for the company. In the suits Mr. Nanavati had not appeared for the company. Not only the suits were not contested, but even the plaints drawn up show very sketchy averments as to how the amounts were due. Apart from that, the company suffered decrees and created charges in favour of each of the aforementioned creditors. These decrees were suffered as stated earlier on 17th April, 1968, when winding up petition was pending against it and the mills of the company had already closed down. The creation of a charge on immovable property would be a transfer of property which, in certain circumstances, either in winding up proceedings or insolvency proceedings, can be attacked as fraudulent preference and if so proved, the transfer can be declared to be void. The attempt of the then directors of the company, which included one Anil Gopaldas Parikh, son of Gopaldas P. Parikh, who was vitally interested in the creditors, was to give benefit or preference to the aforementioned creditors to the detriment of the other unsecured creditors of the company. On the face of it, the creation of the charge was fraudulent preference and having given when the petition for winding up was pending or having been given within a period of 6 months prior to the presentation of these petitions for winding up the company, it would certainly be fraudulent preference. The zeal evinced by the directors in these circumstances in suffering decrees smacks of giving an unfair advantage to the creditors in whom they were vitally interested and detrimental to the financial interest of the company. This conduct is unbecoming of a responsible director of a company. As between a company and director, it is fair to presume that there is a fiduciary relationship and if that presumption is proper, the directors in suffering decrees conducted themselves in a manner unbecoming a custodian of the interest of the company. Their action in giving charges would very adversely hit the other unsecured creditors. The directors preferred between creditors and creditors and especially preferred those in whom they were vitally interested and could certainly be stigmatized as guilty of giving fraudulent preferences. Mr. Gandhi who appeared for the petitioner made no attempt to defend this action of the directors in suffering decrees. One may not take a very serious objection to the suffering of the decrees but for the manner in which they were suffered; but the most undesirable part is of giving charges in favour of select and chosen creditors. If these charges could not have been avoided except in winding up proceedings as fraudulent preferences, no alternative would have been left but to reject the scheme and wind up the company. However, I would presently point out that charges created in favour of the aforementioned creditors no more subsist.

After the charges were created in favour of the aforementioned live creditors, an application was made to the Registrar of Companies in each case for registering the charges as required by section 125 in Part V of the Companies Act. However, Gopaldas P. Parikh filed an affidavit at page 590 of the record in which he has stated that, even though the applications were made to the Registrar of Companies in respect of the charges created in favour of the aforementioned five creditors, the said charges are not registered. The Registrar of Companies was summoned to the court to find out whether the charges were registered by him or not. The Registrar informed the court in the presence of the parties at the hearing of this petition that certain corrections had to be made in the form in which the applications were made and he had informed the directors of the company to make necessary corrections. But before these corrections could be made by the directors, a provisional liquidator was appointed with the result that the corrections were not made and charges were not registered; and unless the provisional liquidator makes the necessary corrections, the charges cannot be registered and the provisional liquidator informed the court that he does not wish to make corrections. If the scheme is sanctioned and the company gets going, the directors will be precluded from making corrections. If the corrections as suggested by the Registrar are not made, the charges cannot be registered and if the charges are not registered, they are void as provided in section 125 of the Companies Act.

It must further be noticed that the aforementioned five creditors have specifically given up their charges. Gopaldas P. Parikh as director of Indequip Ltd. has filed an affidavit at page 499 of the record. He has annexed the resolution of the Indequip Ltd. This resolution would show that Indequip Ltd. has accepted the scheme and has agreed to accept 50 per cent, of its dues in the form of shares and other 50 per cent, as provided by the scheme, which I would point out at a later stage. Indequip Ltd. has agreed not to claim and discharge the company from the liability of paying the amount if the scheme is to be sanctioned. The resolution further shows that the charge created in favour of Indequip Ltd. is relinquished and will not be enforced. In the affidavit of Gopaldas P. Parikh at page 590, he has stated that Indequip Ltd. would not pursue the application for registering the said charge and the application should be deemed to have been withdrawn. There is also the affidavit of Prabhakar L. Khale, Director of Dyestuffs and Chemicals Private Ltd., at page 495 to which is annexed the resolution at page 497, which is to the same effect. There is also an offer on behalf of Dyestuffs and Chemicals Private Ltd. not to claim the remainder of its 50 per cent, dues if the scheme is sanctioned. The charge in favour of Dyestuffs and Chemicals Private Ltd. is relinquished. Further affidavit is filed by Mr. Khale in which he has stated that the application for registration will not be pursued and he undertook to intimate to the Registrar that the application for registration of the charge is cancelled. Mr. S. N. Shelat, learned advocate who appeared for Messrs. Atul Cotton Traders and Messrs. Amarshi Damodar, filed two statements of appearance at pages 694 and 695 signed on behalf of the aforementioned two creditors accepting the scheme and the charges in their favour stand cancelled. It may also be mentioned that the aforementioned two creditors by their two letters dated 15th October, 1969, at pages 533 and 534 of the record have informed the court that they accept the scheme, which in terms means that the charge in their favour would be ineffective and of no consequence. Then remains the case of Indian Electro Chemicals Ltd. Mr. C. C. Gandhi, learned advocate appearing for the Indian Electro Chemicals Ltd., at the earlier stage of hearing stated that he would oppose the scheme on behalf of his clients. Subsequently, during the course of hearing a statement signed by Mr. C. C. Gandhi, advocate for the Indian Electro Chemicals Ltd., has been filed at page 702 of the record to which is annexed a letter from the clients of Mr. Gandhi whereby they informed the court that they do not oppose the scheme. Now, the scheme provides that 50 per cent, of the dues of the unsecured creditors of the Indian Electro Chemicals Ltd. will be converted into share capital by issue of shares and 50 percent, will be paid in a certain manner after some period. Indian Electro Chemicals Ltd. does not oppose the scheme, meaning thereby that it is prepared to accept its dues in the manner provided in the scheme for payment to the unsecured creditors. The scheme does not provide for payment to Indian Electro Chemicals Ltd. as secured creditors. The scheme in fact treats Indian Electro Chemicals Limited as a secured creditor. If Indian Electro Chemicals Limited does not oppose the scheme it would only mean that it would accept the position that it is not a secured creditor and that payment would be made to it in accordance with the provisions for the payment to other unsecured creditors. It would thus appear that all the five charges created by the decrees, which could have been avoided as fraudulent preferences in the event of the winding of the company, have been withdrawn, relinquished or cancelled and, at any rate, are void for want of registration and of no consequence in law. The result which Mr. Vakil seeks to achieve in winding up proceedings is achieved while sanctioning the scheme.

Turning next to the mortgage in favour of the Union Bank and Regional Provident Fund Commissioner, it may be mentioned that Mr. Vakil, after perusing the documents produced by the bank with the affidavit of Mansukhlal Hiralal Trivedi at page 601, did not suggest that the mortgage in favour of the bank for Rs. 13,00,000 dated January 19, 1968, would be a fraudulent preference. Suffice it to say that the bank had advanced cash loan of Rs. 13 lakhs on the security of the State Government to the company and the mortgage security was given towards this cash loan of Rs. 13 lakhs. By no stretch of imagination such a mortgage could be styled as a fraudulent preference.

It was next contended that the deed of mortgage executed by the company in favour of the Central Board of Trustees for the Provident Fund on May 21, 1968, would be a fraudulent preference given to the said trustees. It appears that Rs. 15,05,418.37 were due and payable by the company in respect of the provident fund contribution and Rs. 47,693.80 for administration charges to the Regional Provident Fund Commissioner. It appears that the company had committed default in payment of this amount and the properties of the company were attached. Subsequently, on May 21, 1968, the company executed a mortgage deed in favour of the Central Board of Trustees. It was urged that a petition for winding up the company was pending when this mortgage deed was executed by the company and that, in the absence of the mortgage, the Central Board of Trustees for the Provident Fund would be unsecured creditors and they are given fraudulent preference by executing the mortgage deed in their favour and that would be a fraudulent preference. It is undoubtedly true that the mortgage deed in favour of the Central Board of Trustees was executed on May 21, 1968, when the petition for winding up the company was pending in the court. It is, at any rate, executed within six months prior to the institution of the petition which is now pending and in which prayer for winding up the company is made. If that petition succeeds, investigation will have to be made whether the mortgage in favour of the Central Board of Trustees would amount to a fraudulent preference within the meaning of section 531 of the Companies Act. Mr. R. M. Gandhi, learned advocate who appeared for the Regional Provident Fund Commissioner, urged that the properties of the company were already attached by the revenue authorities at the instance of the Central Board of Trustees right from the year 1961-62 and the Central Board of Trustees gave further time to pay up the amount on the company executing the mortgage deed in favour of the Central Board of Trustees. Accordingly, the company executed the mortgage deed. Mr. Gandhi, however, urged that, even apart from this, the circumstances in which the mortgage deed came to be executed would themselves indicate that it could not be avoided as a fraudulent preference. Mr. R. M. Gandhi referred to the arguments of Mr. D. C. Gandhi in which he has stated that the directors of the company were threatened with prosecution and under the threat of prosecution they executed the mortgage deed. Mr. R. M. Gandhi, however, urged that, assuming that this submission is factually correct, yet, execution of the mortgage in favour of the Central Board of Trustees would not be. a fraudulent preference. Mr. Gandhi urged that, in order to avoid a transfer of property by a debtor in favour of the creditor on the ground of its being a fraudulent preference, it must be shown that the debtor with intent to prefer the creditor has transferred the property, and it must be a free and volitional act of the party. It refers to the state of mind of the debtor and it must be shown that the debtor intended to prefer the creditor or acted in a manner solely with a view to prefer the creditor to the exclusion of others. If, therefore, it could be shown that the debtor acted under an apprehension that he would be prosecuted or under a threat of prosecu tion, the transfer of property by him could not be said to be a free volitional act of the debtor disclosing an intention to prefer the creditor but it would appear that he has acted under the compulsion of the circumstances, may be of his own creation. Reference in this connection may be made to Sharp (Official Receiver) v. Jackson. In that case it was found that the trustee had committed breaches of trust and was insolvent, and, on the eve of his bankruptcy, he conveyed an estate to make good the breaches of trust, this transfer was sought to be avoided as fraudulent preference in a bankruptcy proceeding against a trustee. It was held that the transfer cannot be avoided as fraudulent preference because it was found that the trustee made the conveyance not with the intention or view or object whatever it may be called preferring any person in whose favour the transfer was made but for the sole purpose of shielding himself. In order to find out whether a transfer of property would amount to fraudulent preference, the question should be addressed whether it was done to prefer one of the creditors to the exclusion of others. If it was done not with a view to prefer one of the creditors but to save one's own skin, say a threat of prosecution looming large or to avoid prosecution, certainly the transfer could not in such circumstances be fraudulent preference. This decision has been followed in In re M. I. G. Trust Ltd. Reference may also be made to In re F. L. E. Holdings Ltd. In that case a passage from Buckley on the Companies Acts, 13th Edition (1957), is quoted which shows that as preference implies selection and selection implies freedom of choice, a payment must in order to constitute a preference be voluntarily made, and that a payment made under pressure, e.g., in the shape of proceedings actual or threatened by the creditor concerned, or fear of such proceedings, is not for this purpose a voluntary payment. Viewed from this angle, the transfer by way of mortgage by directors in favour of the Central Board of Trustees would not prima facie appear to be fraudulent preference as it appears that it was done under the threat of imminent prosecution.

Recalling now the submission of Mr. Vakil that the company has been guilty of giving a number of fraudulent preferences they could not be investigated except in a winding up proceedings and, therefore, the scheme is not a proper alternative to winding up, does not carry conviction. The charges created by the decrees in favour of the five aforementioned creditors, which certainly call for investigation, have been set aside without having taken recourse to the proceeding in winding up and two mortgages one in favour of the Union Bank of India and the other in favour of the Central Board of Trustees of Provident Fund have prima facie no tinge of fraudulent preference. Therefore, it is not possible to accept the submission of Mr. Vakil that the fraudulent preferences given by the company would go unchallenged and uninvestigated, if the scheme is sanctioned.

Mr. Vakil further urged that apart from this fraudulent preference given by the directors there are several acts of mismanagement pointed out by the auditors in their report which cannot be investigated and brought to light except in winding up proceedings. The accounts of the company were not written from December, 1967, and they were completed during the course of the proceedings in the court. They have been audited by Messrs. Mahendra Patel & Company, Chartered Accountants, and their detailed report is placed on record. It is true that the auditors have stated that in view of the state of accounts they are not in a position to express opinion whether the accounts give a fair view in respect of the balance-sheet as on 31st March, 1968, and 29th July, 1968, and profit and loss accounts. They have also stated that they were not able to obtain all the information and the explanation which was necessary. They have also stated that the books of accounts have not been kept as required by law. They have also set out certain queries in their report. Those queries will have to be complied with by the Board of Directors that may come into existence if the scheme is sanctioned. But Mr. Vakil could not point out to me any specific case of either embezzlement or of fraud. A very general statement was made that there are several acts of mismanagement which must be investigated in winding up proceedings. Such an allegation is rather vague and devoid of details. On such a vague allegation, the scheme cannot be rejected. But it was urged that even the debt which the company owes to the aforementioned five creditors requires to be verified and checked up; and that also cannot be done, unless the official liquidator in winding up proceedings proceeds to verify the claims lodged with him by the creditor. In order to ascertain and verify the debts owed by the company to the aforementioned five creditors, one need not resort to the extreme provision of the winding up of the company. Those debts can be verified by an order of this court by the official liquidator as court officer, and such a direction can be given while sanctioning the scheme. As for the vehemence with which a grievance was made that there are several acts of mismanagement and misfeasance committed by the directors of the company that for the commercial morality and purity of administration of such a public company it is best to pass an order for winding up the company and investigate its affairs, it must be said that the last board of directors against whom Mr. Vakil with a very facile tongue and vituperative language made serious allegation came into the management of the affairs on 1st January, 1966, and prior thereto Mr. Chandulal Hiralal Banker, the constituted attorney of Mr. Vakil's client, was in active management of the company and even during that period the losses had mounted up to a considerable extent and a land deal in favour of one Bansidhar Private Limited prima facie appeared to be shady. The attitude adopted on behalf of Mr. Chandulal Banker totally fails to carry conviction in the matter and investigation, if need be made, should be made for a period much prior to 1st January, 1966, when Chandulal and Manubhai were in active management of the company. But these are hardly considerations on which it can be said that the scheme approved by a statutory majority is not a proper alternative to winding up. It is not possible, therefore, to accept the submission of Mr. Vakil that this scheme is a cloak put forth to cover the misdeeds of the directors because the cloak, if any, extends to the period when Chandulal and Manubhai were in active management of the company. It is true that if the court comes to the conclusion that the scheme is a cloak to cover the misdeeds of the company or is put forth with a view to shield the directors against the investigation into their mismanagement of the affairs of the company, the scheme cannot be accepted, only on the ground that it has been approved by the creditors and members. Reference in this connection may be made to In re Calcutta Industrial Bank Ltd., wherein it is observed that the creditors, left to themselves, do not appreciate the importance of many things unless it is brought to their notice. The object of having the affairs of the company investigated by an independent auditor was to bring all material facts relating to the management as well as the present financial position of the company to the notice of the creditors so as to enable them to make up their minds whether they should at all enter into any arrangement with such a company. Reference was also made to Pioneer Dyeing House Ltd. v. Dr. Shankar Vishnu Marathe.One of the grounds for opposing the scheme in that case was that the object of the scheme was to cover the deeds of the delinquent directors. It was observed that if the scheme is sanctioned, the winding up order will stand set aside, the liquidators will be discharged, there will be none to prosecute the misfeasance summons against the erring directors and the assets of the company will once again fall into the hands of persons whose rectitude is under a cloud; and that cannot be permitted under the cloak of a scheme of reconstruction. It would undoubtedly be so if the scheme is put forth as a cloak to cover the misdeeds of the directors. (But it will be a question of fact in each case as to whether it is so). In the aforementioned case the first scheme proposed was rejected and after a lapse of a period of ten years after the order for winding up was made another scheme was proposed which when examined disclosed a number of defects. In the facts and circumstances of this case, it does not appear that the scheme is put forth with a view to shield the directors of the company. When it comes to choosing between a scheme for reconstruction and an order for winding up after keeping all the circumstances of the case as also the question of commercial morality in view and if the scheme appears to be feasible and workable, it should be preferred to compulsory liquidation. The second contention of Mr. Vakil, therefore, cannot be accepted.

Re. Ground No. 3.—The third ground of attack was that the scheme proposes scrapping of Unit No. II and part of Unit No. I of the mill of the company and in the absence of a permission for scrapping a textile mills, it would be illegal to sanction the scheme. The scheme envisages scrapping of Unit No. II of the mills of the company. The mills of the company are divided into two units described as Unit No. I and Unit No. II. There are 501 looms and 13,488 spindles in Unit No. I and there are 308 looms and 23,160 spindles in Unit No. II. The scheme proposes that Unit No. I with 400 looms and 15,000 spindles should be restored and Unit No. II comprising the rest of looms & spindles and machinery should be scrapped. Scrapping of Unit No. II is an integral and inseverable part of the scheme because by scrapping the company hopes to realise Rs. 14 lakhs which would go towards the discharge of debts of the bank and the central board of trustees of the provident fund. Mr. Vakil urged that a textile mill cannot be scrapped without the permission of the Central Government. No provision or statute was pointed out to the court which would show that textile mills cannot be scrapped without the permission of the Central Government. But it was common ground that such a permission is essential before a textile mill can be scrapped. Mr. D. C. Gandhi for the petitioner urged that the company has obtained such a permission while Mr. Vakil strongly urged that there is no such permission. The company applied for such a permission and the letter of the Government of India, Ministry of Commerce, dated l/4th October, 1966, at page 175 of the record shows that such a permission was granted. It is stated in the letter that the Government of India have no objection to M/s. Maneckchowk & Ahmedabad Manufacturing Company Mills, Ahmedabad, being scrapped. If the matter were to rest with this letter, it would indisputably appear that the permission to scrap the whole mill which would enable the company to scrap a part of the mill was granted. Mr. Vakil however urged that this permission was cancelled and even the company has admitted that it was withdrawn and is no more effective and no fresh permission is applied for or obtained. In this connection Mr. Vakil first referred to the report of the court of inquiry constituted by the Government of Gujarat under section 100(1) of the Bombay Industrial Relations Act presided over by Mr. D. M. Vin which has inquired into some aspects concerning the company. The report of the court of inquiry is published in the Gujarat Government Gazette, Part I-L, dated 10th October, 1968. The company appeared in this inquiry and filed its statement, part of which is reproduced in the report. In para. 5 of the report it is stated that the Government of India, Ministry of Commerce, permitted scrapping of the mill but that permission was subsequently withdrawn at the instance of the Textile Labour Association. Relying on this statement of the company before the court of inquiry, it was urged that even according to the company the permission was withdrawn and no fresh permission is granted. Mr. D. C. Gandhi for the company urged that what is sought to be culled out from the report as an admission of the company is not accurate. Mr. Gandhi urged that the permission was at best kept in abeyance till April, 1967, and as no further order is made by the Government of India, the original permission became effective and is still effective. The letter of the Government of India at page 175 of the record shows that the permission to scrap the whole mill was granted. At that stage, the Textile Labour Association, which is a representative Union of the workers of this company, opposed the grant of such permission with the result that the Government of India, Ministry of Commerce, by its letter dated 15th December, 1966, informed the company that the question of scrapping of the mills of the company would be further examined and the decision conveyed by the letter of the Government of India dated l/4th October, 1966, by which permission was granted was to be held in abeyance till April, 1967. This letter of the Government of India is at page 389 of the record. If the decision of the Government of India granting permission was held in abeyance for a certain period and if no further order was made, cancelling or revoking the permission, obviously after the period having expired, the permission would be good and valid. It was, however, urged that a later query with the Government of India disclosed that no such permission as alleged by the company is granted. During the pendency of this petition Mr. Vakil for the contesting creditors addressed a letter to the Textile Commissioner on 29th November, 1968, inquiring whether the company has been granted permission to scrap the mill or any unit thereof or any prohibitory order has been issued against the company against scrapping the unit under the Cotton Textile Control Order, 1948. This letter of Mr. Vakil was forwarded by the Assistant Director to the Textile Commissioner,I.L. Section. Finally, by the letter from the office of the Textile Commissioner dated 23 rd December, 1968, Mr. Vakil was informed that the Government of India had not permitted the management of the Maneckchowk & Ahmedabad Manufacturing Company Limited to scrap their unit. These last three letters are at pages 318 to 320 of the record. Relying on these letters it was strenuously urged that no permission is granted or at any rate no valid permission is in force and if the permission is not in force or effective, Unit No. II cannot be scrapped and the very foundation of the scheme is knocked out. The contention appears to be entirely without merits. It cannot even be disputed that the Government of India by its letter dated 1/4th October, 1966, did grant permission to scrap the whole mills. This permission was to be held in abeyance as per the letter of the Government of India dated 15-12-1966 till April, 1967. The query of Mr. Vakil may have been directed to the Textile Commissioner and the reply of that office that no such permission is granted cannot be accepted in the face of the letter dated l/4th October, 1966. The period during which the permission was held in abeyance having expired and no order having been made either cancelling or revoking the permission, the permission would be good and valid and the company was justified in proceeding on the basis that it has got a valid permission to scrap Unit No. II. It may incidentally be mentioned that the permission was held in abeyance on an objection raised by the Textile Labour Association representing the workers of the company. The Textile Labour Association has entered into an agreement with the company and has accepted the scheme; when the Textile Labour Association accepted the scheme it is implicit that it agrees to scrapping of Unit No. II which would result in discharge of some of the workmen, yet, the textile Labour Association does not raise any objection to the scrapping of Unit No. II. Therefore, also, it appears crystal clear that the permission for scrapping Unit No. II is good and valid and would be effective. Further, it may be mentioned that Mr. B. R. Shah, learned Assistant Govt. Pleader, appearing for the State of Gujarat, relying on the relevant files of the industries department, made a statement to the court that there is nothing on the record of the Government that permission granted by the Government of India is cancelled or set aside or withdrawn.

It is, therefore, not possible to accept the submission of Mr. Vakil that there is no valid permission for scrapping Unit No. II and scrapping of Unit No. II being an integral part of the scheme, the scheme cannot be sanctioned.

Re. Ground No. 4.—The next ground of attack of Mr. Vakil is that the proposed scheme envisages reorganization of the share capital of the company including reduction and increase of share capital, which cannot be done without going through the whole gamut of the procedure prescribed for the same and, as it is an inseverable part of the scheme, it would be futile to sanction the remainder of the scheme in its mutilated form. It is undoubtedly true that the scheme envisages reorganization of the share capital of the company. The share capital of the company is at present divided into 788 ordinary shares of each of Rs. 1,000 and 1,050 preference shares each of Rs. 100 fully paid. The scheme envisages reduction of share capital by REDUCING the face value of the ordinary shares of Rs. 1,000 to Rs. 250 and preference shares of Rs. 100 to Rs. 25. The scheme also envisages fresh issue of share capital by converting 50 per cent, of the claim of the creditors by issue of fresh shares. As a necessary corollary the authorised, issued and subscribed share capital of the company would be increased. Thus the scheme envisages reorganization of the share capital of the company. There are certain specific provisions in the Companies Act which prescribe the procedure for the reduction of the share capital and for increase of the share capital. The issue of fresh share capital is governed by the Capital Issues (Control) Act, 1947. The contention of Mr. Vakil is that, as part of the scheme it is not open to the court to sanction reorganization of the share capital which includes reduction, increase and issue of fresh capital. It was urged that if the scheme of compromise and arrangement envisages reorganization of share capital, it cannot be sanctioned as part of the scheme and the provision of the Companies Act which prescribe the procedure for reduction of share capital and increase of share capital and issue of fresh capital must be specifically and strictly complied with. On the other hand, it was urged by Mr. Gandhi that section 391 provides a complete code for the reconstruction of the company which may include reorganization of its capital as part of the scheme of compromise and arrangement. In other words, it was urged that if the scheme of compromise and arrangement includes in its ambit reorganization of the share capital then it can be carried out as part of the scheme of compromise and arrangement and it is not at all necessary to go through the whole gamut of the procedure prescribed for the reduction of share capital and for issue of fresh capital. There seems to be considerable force in the contention of Mr. Gandhi that section 391 is a complete code. It provides for a scheme of reconstruction and amalgamation of companies. The scheme of reconstruction of a company may also include a compromise and arrangement between the company and its creditors or any class of them or between the company and its members or any class of them. Section 390(b) provides that the expression "arrangement" as used in sections 391 and 393 includes a reorganization of the share capital of the company by the consolidation of shares of different classes or by the division of shares into shares of different classes or by both those methods. It is an inclusive definition. It was attempted to be urged that the arrangement herein defined does not include increase of share capital, so also it does not include reduction of share capital even though a specific provision is made as to what procedure would be gone through when the scheme of compromise and arrangement provides for reduction of share capital. Rule 85 of the Companies (Court) Rules, 1959, provides that where a proposed compromise or arrangement involves a reduction of capital of the company, the procedure prescribed by the Act and the Rules relating to the reduction of capital and the requirements of the Act and these Rules in relation thereto shall be complied with, before the compromise or arrangement, so far as it relates to reduction of capital, is sanctioned. If section 391 were not to be treated as complete code and if it is intended that various things that can be done by way of a scheme of compromise and arrangement, if they were to fall under different provisions of the Companies Act which prescribe certain procedure for doing the same and that procedure has to be gone through, it was not necessary to provide specifically that if the scheme of compromise and arrangement includes reduction of capital special procedure in respect of reduction of capital must be gone through before it could be sanctioned as part of the scheme of compromise and arrangement. There seems to be good reason for making such a provision in rule 85. A scheme of compromise and arrangement may be between company and creditors or between the company and members. If the proposed scheme offers compromise or arrangement between the company and its members only and it envisages reducti6n of share capital which can be carried out as part of the scheme under section 391 without going through the procedure prescribed under section 100 onwards, it may be that reduction of share capital in a given case may adversely affect the creditors and the creditors would have no chance to object to the same. It is manifestly clear that reduction of share capital in certain circumstances may adversely affect the creditors but if reduction of share capital is brought about as part of the scheme of compromise and arrangement between the company and its members yet as this prescribed procedure for affecting reduction of share capital has to be gone through even though it forms part of a scheme of compromise and arrangement, the creditors will have a chance to object to the same if it adversely affects them. Such would not be the case where the capital is increased or the rights of various classes of shareholders are altered or changed. The reorganization of capital as envisaged in section 390 would certainly include increase and reduction of share capital, but reduction of share capital can be brought about by arrangement between the company and members yet it will have direct impact on the creditors and therefore a specific provision is made in rule 85 that even if reduction of share capital is to be effected as part of the scheme of compromise and arrangement, the procedure prescribed for reduction of share capital in the Companies Act and the Rules must be gone through before the scheme is sanctioned. This specific provision would indicate that other things such as increase of share capital simpliciter when sought to be carried must be done according to procedure prescribed for the same. It can also be done as part of a scheme of compromise and arrangement and the result can be achieved by following the procedure prescribed in section 391. Section 391 provides a complete code of putting through a scheme of compromise and arrangement which may even include reorganisation of share capital subject to the well recognized exception that if reorganization of share capital included reduction of share capital, the prescribed procedure for effecting the same must be gone through in view of rule 85 before the scheme could be sanctioned. If rule 85 were not enacted, obviously, reduction of share capital could have been effected as part of the scheme of compromise and arrangement without going through the procedure prescribed in section 100 onwards. The very fact that a specific rule had to be enacted for this purpose indicates that section 391 is a complete code providing for all those things which can be included in a scheme of compromise and arrangement and all those things can be brought about by the procedure prescribed in section 391 onwards. The nature of compromise that can be entered into under section 391 is not defined. The definition of reorganization of capital is an inclusive definition which would not exclude reduction of share capital or increase of share capital which would also be a kind of reorganization of the share capital of a company. If section 391 was subject to other provisions of the Act every time the scheme of compromise and arrangement is put forth for the sanction of the court, if it includes things for which specific provisions are made and that will have to be gone through before the scheme is sanctioned, it would result in unnecessary duplication of procedure and would be cumbersome. On the contrary, it appears that if the creditors and members of the company arrive at a certain compromise which the court considers fair, it can be sanctioned under section 391 despite the fact that for some of those things included in the compromise another procedure is prescribed in the Companies Act and which has not been carried out. It, therefore, appears that section 391 is a complete code which provides for sanctioning of the scheme of compromise and arrangement. If such a scheme of compromise and arrangement includes increase of share capital, it can be done as a part of the reorganization of the share capital, which would be part of the arrangement that would be brought about between the company and its members. In case of reduction of share capital, in view of rule 85, the procedure prescribed under section 100 and onwards will have to be gone through. Looking at the matter from a slightly different angle, it appears that section 391 is a special provision for sanction of a scheme of reconstruction of companies, of amalgamation of companies and for a scheme of compromise and arrangement. The scheme of compromise and arrangement, or for that matter even the scheme of amalgamation of two companies, may envisage reorganisation of share capital of one or the other company. The Companies Act no doubt makes provision for reduction of share capital simpliciter, increase of share capital simpliciter, or fresh issue of capital simpliciter without its being part of any scheme of compromise and arrangement. The scheme of compromise and arrangement can be brought about only between the company which is liable to be wound up under the Companies Act and its members or creditors. The special provision contained in section 391. namely, sanction of the scheme of compromise and arrangement would in my opinion exclude general provisions for reduction of share capital or for issue of fresh capital. It is well settled that a special provision should be given effect to the extent of its scope, leaving the general provision to control cases where the special provision does not apply: vide South India Corporation (P.) Ltd. v. Secretary Board of Revenue and C. Rajagopalachari v. Corporation of Madras, Therefore, it appears that the provisions contained in section 391 is a complete code. As a necessary corollary, if the scheme of compromise and arrangement includes reorganization of share capital except reduction of share capital, it can be sanctioned as a part of the scheme of compromise and arrangement. In the case of reduction of share capital as part of the scheme of compromise and arrangement, rule 85 will have to be given full effect. The scheme has been approved by a statutory majority as will be presently pointed out and if the scheme is to be sanctioned as part of such a scheme, reorganization of the share capital except the reduction of share capita] can be sanctioned. It will, of course, be necessary to find out whether the procedure prescribed for effecting reduction of share capital has been gone through or not.

The reorganization of the share capital sought to be effected by the scheme involves reduction of share capital, issue of fresh share capital and increase of share capital. It will be proper to dispose of first the question with regard to increase and issue of fresh capital. The memorandum of association of the company shows that the issued and subscribed capital of the company consisted of 788 ordinary shares each of Rs. 1,000 and 1,050 redeemable cumulative preference shares of Rs. 100 each. Thus the total issued and subscribed capital was Rs. 8,93,000. The preference shares were redeemable cumulative preference shares. Article 10 of the company's articles of association provides that the company may by ordinary resolution in general meeting alter the conditions of its memorandum by increase of its share capital, by such amount as it thinks expedient by issuing new shares as may be necessary. The company can also divide and consolidate its shares. Thus the company has reserved powers to itself to increase the share capital by ordinary resolution in a general meeting. Now, when share capital is increased and fresh shares are issued, such issue would be governed by section 81. Section 81 provides that such fresh issues should be offered to persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date. The procedure for making the offer is also set out in section 81(1). It was urged that even if it be assumed that the company has power to increase the share capital, fresh share capital can be issued only to the existing shareholders in proportion to the capital paid up on those shares on that date. The scheme envisages increase of share capital by converting 50 per cent, of the claim of the unsecured creditors into paid up share capital at the reduced value of shares. It is no doubt a fresh issue of capital to persons other than existing shareholders and it would also result in increase of capital; the company having power to increase its capital can further issue capital but it is urged that it can be done in the manner provided in section 81(1) and, if the scheme is sanctioned, it would result in contravention of section 81(1). Sub-section (i A) of section 81 provides as under:

"81. (1A) Notwithstanding anything contained in sub-section (1), the further shares aforesaid may be offered to any persons (whether or not those persons include the persons referred to in clause (a) of sub-section (1)) in any manner, whatsoever—

(a) if a special resolution to that effect is passed by the company in general meeting, or

(b) where no such special resolution is passed, if the votes cast (whether on a show of hands, or on a poll, as the case may be) in favour of the proposal contained in the resolution moved in that general meeting (including the casting vote, if any, of the chairman) by members who, being entitled so to do, vote in person, or where proxies arc allowed, by proxy, exceed the votes, if any, cast against the proposal by members so entitled and voting and the Central Government is satisfied, on an application made by the board of directors in this behalf, that the proposal is most beneficial to the company."

There is a similar provision in article 15 of the articles of association of the company. It would appear that sub-section (1A) permits issue of further shares to persons other than the existing ordinary shareholders of the company. It cannot, therefore, be said that issue of further shares to the persons other than the existing shareholders of the company is wholly barred. It would only require special resolution to that effect passed by the company in the general meeting. If, therefore, a special resolution for issue of further shares after increasing the capital to persons other than the existing shareholders of the company is passed in a general meeting of the company, section 81 would not be contravened. In the present case, the scheme provides for issue of further shares and these further shares are to be issued to the persons other than the existing shareholders of the company. The further shares are to be issued to the creditors of the company in satisfaction of the 50 per cent, of their claims. Mr. Vakil urged that before sub-section (1A) of section 81 can come into play, it must be shown that the special resolution has been passed in the general meeting of the company. Mr. Vakil urged that the meeting of the company to be a general meeting must be of all the members of the company entitled to attend and vote and the resolution to be a special resolution must satisfy all the requirements of section 189 of the Companies Act. It was urged that if the members of the company did not meet together at one place to consider the resolution but divided themselves and met in two separate meetings, it cannot be said that the proposal for further issue of shares was considered in the general meeting of the company. There are two classes of members of the company. They are: (1) holders of ordinary shares; and (2) holders of redeemable cumulative preference shares. Article 5(b) of the articles of association of the company provides that the cumulative preference shares shall not entitle the holders thereof to be present at or to vote either in person or by proxy at any general meeting of the company unless a resolution is to be passed affecting their rights or privileges. Further issue of ordinary shares would not affect the rights or privileges of the holders of the preference shares. Therefore, if article 5(b) were to apply, the holders of the cumulative preference shares had no right to attend and vote at any general meeting. The general meeting of the company would be a meeting of ordinary shareholders of the company. Indisputably, such a meeting has been held and therein the scheme has been voted upon which includes issue of further shares. But it was urged that as the interest for more than two years payable on redeemable cumulative preference shares is in arrears, section 87(2)(b)(i) and article 119(b)(i) of the articles of association of the company would come into play and they would have a right to attend and vote at every general meeting. That of course is true. The question then is if the holders of the preference shares met in a meeting separate from the meeting of the ordinary shareholders and in each meeting the proposal for further issue of shares was considered and voted upon by a majority of 75 per cent, of members present and voting, could it be said that special resolution has been adopted? It was very vehemently urged that the concept of a general meeting connotes consensus or meeting of minds and joint deliberation and that would be lacking in group or class meetings. It was urged that to interpret the concept of general meeting otherwise would permit the company to consult each individual shareholder to consider the proposal denying the benefit of joint deliberations and even if all shareholders agree to the proposal it cannot be said that there was a meeting of the minds which is of the essence of a general meeting. It was, therefore, urged that the meeting of a class of members and general meeting of all members are two distinct things. In my opinion, what is of the essence of the matter is that the persons affected must have an opportunity to consider the proposal and deliberate together. If the deliberations are carried on by two distinct classes having distinct interests separately it cannot be said that the proposal has not been considered in a general meeting. A too narrow and strict view may necessitate first convening the meeting of two classes together and then for the purpose of the scheme separate meetings of each class. It, in my opinion, would be an idle formality. It would be more so on the facts of this case because preference shareholders were not ordinarily entitled to attend and vote at the meeting but for the eventuality that the interest payable on preference shares is in arrears. Therefore, in my opinion, it cannot be said that the resolution adopted was not adopted at a general meeting. Even if it be said that joint deliberation of all those who are entitled to participate in the meeting is of the essence of a general meeting, it cannot be said that two classes of persons one of whom in ordinary circumstances was not entitled to attend the meeting deliberated in a different meeting and both adopted the same resolution, there was no joint deliberation. In fact when one class of members are likely to overwhelm the other class, to safeguard the interest of the other class, deliberations are held in separate meetings, but a common resolution is adopted by both the meetings and in each meeting it was passed with statutory majority. It can never be said that the resolution was not adopted at a general meeting. Reference was made to Sharp v. Dawes. In that case a meeting was called by the secretary and only one shareholder attended, where a resolution was adopted making a call on the share and pursuant to this resolution a call was made which was challenged. It was held that one shareholder cannot constitute a meeting. I fail to see how this observation is of any use in the present case.

The question then is whether the requirements of a special resolution are satisfied. Section 189 of the Companies Act provides as to which resolution could be said to be a special resolution and in what manner it should be passed. Sub-section (2) thereof provides that the special resolution could be said to have been passed when the votes cast in favour of the resolution are three times the number of votes, if any, cast against the resolution— meaning thereby that it must be passed by 75 per cent, majority of the members present and voting. The notice convening the meeting at which the resolution is passed should be given 21 clear days before the date of the meeting as required by section 171. In the notice convening the meeting, intention to move the resolution as a special resolution should be specifically set out and explanatory note should be annexed thereto. In order to be a special resolution, the aforementioned conditions have to be complied with. The notice convening the meeting was issued on 3rd September, 1968, and the meeting was to be held on 5th and 6th October, 1968. The proposed scheme of compromise and arrangement in respect of the company was annexed to the notice and it was specifically set out in the scheme that the face value of the ordinary shares will be reduced from Rs. 1,000 to Rs. 250 and of the preference shares from Rs. 100 to Rs. 25 and thereafter 50 per cent, of the claim of the unsecured creditors will be coveted into share capital by issue of further shares to unsecured creditors. In the notice convening the meeting it was stated that the meeting is specifically convened to consider the proposed scheme and to approve the same with or without modification. The production programme after the mill is restarted along with the production estimate and cash flow statements were also annexed to the notice convening the meeting. Thus the notice convening the meeting gave information to the members that the meeting is being convened for considering the proposed scheme which included both reduction and increase of share capital. The votes cast in favour of the resolution approving the scheme were more than three times the votes cast against it. Therefore, sub-clauses (b) and (c) of sub-section (2) of section 189 are strictly complied with. It was, however, urged that clause (a) is not properly complied with inasmuch as in the notice convening the meeting, intention to move the resolution as a special resolution was not set out. Taking a very strict view of sub-section (2)(a) of section 189, it might appear that the requirement therein contained is not properly complied with. The question then is whether clause (a) is mandatory in terms or it is merely directory. If it is mandatory, different considerations might arise. If it is held to be directory, the doctrine of substantial compliance would come into play. It is not inconceivable that part of the section may be directory and part of the section may be mandatory. It cannot be gainsaid that clauses (b) and (c) of sub-section (2) are certainly mandatory. The notice of certain duration must be given and resolution must be adopted by a statutory majority. This requirement could, by no stretch of imagination, be said to be directory; otherwise sub-section (2) may lose all its significance. Even giving of notice may be said to be mandatory. But the question is whether failure to set out in the notice convening the meeting to move a particular resolution as a special resolution could be said to be mandatory. There is no general rule for determining whether particular provision in a statute is a mandatory or directory. The court must look at the purpose for which the provision is made, its nature and intention of the legislature in making the provision, to find out whether it is directory or mandatory. The use of the word 'shall' is not decisive of the matter. In Raja Buland Sugar Co. Ltd. v. Municipal Board, Rampur, the Supreme Court has in this connection observed as under:

"The question whether a particular provision of a statute which on the face of it appears mandatory—inasmuch as it uses the word 'shall' as in the present case—or is merely directory cannot be resolved by laying down any general rule and depends upon the facts of each case and for that purpose the object of the statute in making the provision is the determining factor. The purpose for which the provision has been made and its nature, the intention of the legislature in making the provision, the serious general inconvenience or injustice to persons resulting from whether the provision is read one way or the other, the relation of the particular provision to other provisions dealing with the same subject and other considerations which may arise on the facts of a particular case including the language of the provision, have all to be taken into account in arriving at the conclusion whether a particular provision is mandatory or directory."

In that case section 131(3) of the U. P. Municipalities Act came up for consideration. Section 131(3) is divided into two parts. The first part lays down that the Board shall publish proposals and draft rules along with a notice inviting objections to the proposals or the draft rules so published within a fortnight from the publication of the notice. The second part provides for the manner of publication and that manner is according to section 94(3). The condition of prior publication is always held to be mandatory. Yet, while considering the question of non-compliance with the manner of publication as provided in section 94(3), the Supreme Court observed that the requirement of publication is mandatory but the manner of publication appears to be directory and, so long it is substantially complied with, that would be enough for the purpose of providing the taxpayers a reasonable opportunity of making their objections. It would thus appear that part of section 131(3) was held to be mandatory while part of it was held to be directory. Approaching the subject from this angle, it would appear that clause (a) of sub-section (2) appears to be directory and not mandatory. The purpose behind making this provision appears to be to convey definite information about matters to be considered at the ensuing meeting. The explanatory note to be annexed will enable members to understand and appreciate the object behind the proposed resolution. The intention being a state of mind in this case the state of mind of a corporate body is required to be set out for the benefit of the members of the corporate body. The question then is whether the requirement of setting out this intention in the notice could be said to be such mandatory requirement, the failure to comply with it would invalidate the resolution. The purpose behind enacting this provision and its nature and the intention of the legislature and the general inconvenience that the failure to observe it is likely to cause to members all go to show that the requirement to set out the intention to move a resolution as special resolution could not be mandatory. The resolution ought to be adopted as special resolution and that requirement is mandatory. But the setting out of the requisite intention in the notice convening the meeting could not be mandatory but only directory. The absence of requisite intention in the notice was not likely to cause serious inconvenience to the members. Considering the provision in juxtaposition with clauses (b) and (c), it appears that the provision contained in clause (a) is directory and it is sufficient if it is substantially complied with.

The notice convening the meeting to which the proposed scheme was annexed and various statements including the statement under section 393 (1)(a) annexed to it would give sufficient information to the members that they have to consider both increase and reduction in share capital. That, in my opinion, would be substantial compliance with the provisions contained in sub-section (2)(a) and provisions contained in sub-sections (2)(b) and (2)(c) are strictly complied with. Therefore, the resolution adopted will have all the trimmings of a special resolution and it can be said with reasonable certainty that a special resolution at a general meeting as envisaged by clause (1A) of section 81 has been adopted. If such a resolution is adopted further issue of shares to persons other than the members of the company would be legal and valid even though it's done in contravention of the provisions contained in section 81(1).

Incidentally it was contended that even if the special resolution was adopted at a general meeting as provided by section 81(1A), yet notice of that meeting was not given to the auditors as required by section 172(2)(iii) and the explanatory note as provided under section 173(2) was not annexed to the notice and, therefore, the resolution could not be said to have been adopted as a special resolution. Sub-section (3) of section 172 provides that the accidental omission to give notice to, or the non-receipt of notice by, any member or other person to whom it should be given shall not invalidate the proceedings at the meeting. Non-issue of the notice to the auditors, in my opinion, would be covered by sub-section (3) of section 172. As for the explanatory note as envisaged by section 173(2) it must be stated that the whole scheme annexed to the notice and production and cash flow statement and statement under section 393(1) would provide sufficient material as to be an adequate substitute for explanatory statement as envisaged by section 173(2) and, therefore, also, the proceedings of the meeting would not be invalid or proceedings would not be vitiated.

The above discussion would establish that the resolution for increasing the share capital of the company has been adopted in a general meeting of the members of the company and the resolution satisfies all the requisites of a special resolution. It would appear that the requirements of section 81(1A) of the Companies Act are fully satisfied and it would be lawful for the company to issue further ordinary shares as part of the scheme to both holders of ordinary shares and persons other than present holders of ordinary shares of the company but all of whom should be unsecured creditors of the company and further shares should be issued only in satisfaction of 50 per cent, of the claim of each unsecured creditor.

It was next contended that the issued and subscribed capital of the company would be raised by roughly Rs. 39 lakhs by converting 50 per cent, of the claims of the unsecured creditors into share capital and that would be in contravention of section 3 of the Capital Issues (Control) Act, 1947. It is indeed true that fresh capital cannot be issued without the permission of the Controller of Capital Issues as provided by section 3 of the said Act. The scheme envisages increase of capital by roughly Rs. 39 lakhs. Permission for issue of fresh capital is not obtained from the Controller of Capital Issues. However, that should not come in the way of the court considering the scheme because that part of the scheme can come into operation after obtaining the permission of the Controller of Capital Issues. That was the view taken by me in a similar situation in In re New Commercial Mills Co. Ltd. and I am informed that necessary permission by the Controller of Capital Issues was obtained soon after the scheme was sanctioned by the court.

The second ground of attack of Mr. Vakil under the head of reorganization of share capital is that the company would be issuing fresh shares at a discount in contravention of section 79 and the court should not, therefore, sanction the scheme. The contention is entirely without merits. Section 79 provides that a company shall not issue shares at a discount except as provided in sub-section (2) thereof. Sub-section (2) provides that a company may issue shares at a discount if the issue is authorised by a resolution passed by the company in general meeting and sanctioned by the court and the resolution specifies the maximum rate of discount (not exceeding 10%, or such higher percentage as the Central Government may permit in any special case) at which the shares are to be issued and not less than one year has at the date of the issue elapsed since the date on which the company was entitled to commence business and the shares should be issued within two months after the date on which the issue is sanctioned by the court. Mr. Vakil urged that 50 per cent, of the claims of the unsecured creditors are to be converted into shares; in other words, 50 per cent, of the claims of the unsecured creditors will be paid in the form of shares. Mr. Vakil had twofold objection to the issue of shares in this manner. The first limb of the argument was that, even according to the company, if the company is wound up, the unsecured creditors are likely to get nothing and their claims are merely chose-in-action which are entirely worthless in respect of which shares of Rs. 250 fully paid up will be issued in proportion to the claims and the shares would thus be issued at a discount. The other limb of the argument was that the shares are issued otherwise than for cash because they would be in payment of claims which cannot be realized. Reliance was placed on a statement in the affidavit of the petitioner that in the event of the winding up the unsecured creditors are not likely to get anything looking to the assets and liabilities of the company and the claim of the secured creditors and preferential creditors. Undoubtedly there is a statement to that effect in the affidavit of the petitioner. Does it necessarily imply that if the shares are issued against the claim of the unsecured creditors, the issue is either at a discount or for no consideration? It will be presently pointed out that in order to write off the loss of capital the share capital is being reduced by reducing the face value of ordinary shares of Rs. 1,000 fully paid up to Rs. 250 fully paid up and cumulative redeemable preference shares of Rs. 100 fully paid up to Rs. 25 fully paid up. After the reduction of the face value, the shares will be allotted and issued to the unsecured creditors in satisfaction of 50 per cent, of their claims. For every ordinary share of Rs. 250 issued, the claim of the unsecured creditors exactly to that extent will be wiped out. Unless an idle formality of the company paying Rs. 250 cash towards discharge of the liability of the unsecured creditor and then every unsecured creditor buying the shares of the company is to be insisted upon, it can never be said that the issue is either at a discount or for no consideration or for consideration otherwise than cash. In fact for every ordinary share of Rs. 250 issued, the liability of the company to the unsecured creditor would be proportionately decreased and wiped out. In other words, the company will get Rs. 250 for a share of Rs. 250. But it was urged that even a share of Rs. 250 of this company would not fetch anything in the market and when it is issued for a consideration of Rs. 250 to unsecured creditors the issue is based on misrepresentation. There again, I see no substance. A majority of unsecured creditors of the company, except very few represented by Mr. Vakil, have approved the scheme and thereby agreed to accept the ordinary share of this company of Rs. 250 as against his claim of Rs. 250. There is no misrepresentation involved in such a transaction. The statement of the petitioner that in the event of the company being wound up the unsecured creditor is not likely to realise anything cannot be the foundation for a submission that as the claim is merely a chose-in-action and entirely worthless it cannot provide consideration for issuance of the shares of the company nor could it be the foundation for a submission that the shares are issued for a consideration otherwise than cash or for no consideration. In this connection, it was lastly urged that, even though new ordinary shares issued at Rs. 250 would be fully paid up share, yet, in the event of the company being wound up, the liquidator would certainly inquire if anything was paid by the holder towards the share of Rs. 250 and in that event if his finding that the claim that was set off against the issue of shares was entirely worthless or of no value it would be open to the liquidator to treat such shareholder as contributory and to insist upon his contributing Rs. 250 into the assets of the company. Reliance in this connection was placed on In re Anglo-Moravian Hungarian Junction Railway Company In that case one Dent, a subscriber to the memorandum of association of a limited company, subscribed for 100 shares. The articles of association recited that Even, who assigned the concession to the company, had agreed to cause fully paid up shares to be allotted to all the persons subscribing the memorandum. Subsequently £ 4,000 fully paid up shares were issued to Even for work done by him for the company and Even requested the company to allot 100 shares out of the same to Dent. Subsequently the company was ordered to be wound up and the official liquidator placed Dent on the list of contributories for 100 shares and made calls upon him to pay the amount. The contention of Dent was that the shares allotted to him were fully paid up shares and, therefore, he was not liable to pay anything as contributory. His further contention was that even though he had subscribed for 100 shares, as the shares were allotted to him at the instance of Even and that the shares were fully paid up shares, he was not liable to pay as a contributory. Negativing this contention it was held as under:

"........ where a man, by subscribing to the memorandum of association

contracts a liability to pay to the company the full amount of his shares, and by another contract agrees to receive a certain number of paid-up shares, so that he is to have two sets of shares, one on which he is to be liable, and one on which he is not to be liable, he cannot extinguish his liability on the shares for which he has subscribed by setting off against it that which, although it might be valuable to him, would not increase the capital of the company and cannot therefore be assumed to be an equivalent, in money's worth, to the payment of his shares."

In fact the present case is simpler in which the company proposes to issue shares to unsecured creditors in satisfaction of its liability. Issue of one share of Rs. 250 fully paid-up to an unsecured creditor would go to discharge an equivalent amount of debt owed by the company to the unsecured creditors. Such an arrangement brought about between the company and its creditors and members cannot be contested on hypothetical submission that the share has no value in the market nor the claim could ever be realised in the event of winding up. In fact the arrangement as proposed here is quite legal and valid and that also becomes evident from the further observations from the judgment quoted above. The relevant observation is as under:

"The previous agreements between Even and the company are all before the court, and I find that in the particular agreement referred to, which is dated the 19th September, 1865, certain persons who are subscribers to the memorandum of association, being creditors of the contractor for work and labour done, or money advanced for preliminary expenses in respect of which he had a claim upon the company, are to be paid what is due from him to them in paid-up shares of the company; and I do not say that the court would not give effect to such an arrangement. I must not be understood as deciding, to the prejudice of any of those persons, that if they were really creditors of the contractor for matters for which he was entitled to be paid by the company, they might not receive under those documents their payment in paid-up shares, and have those shares attributed to their subscription to the memorandum of association; the effect being, to discharge" the company from an equivalent amount of debt, due from the company to the contractor."

This is exactly the position in the case before me. For each share issued to the unsecured creditor the liability of the company for the amount equivalent to the face value of the share would stand discharged or the company would be discharged from equivalent amount of debt due from the company to the unsecured creditor. Such arrangement, in my opinion, is quite legitimate and can be the subject-matter of compromise and arrangement between the company and its members and creditors and, if it is otherwise reasonable and fair, must be given effect to At any rate, it cannot be thrown out on the ground that on the one hand the share would fetch no price if it is sold in the market and the claim of the creditor being a chose-in-action has a debatable value or is of no value. Reference in this connection may be made to the Ooregum Gold Mining Co. of India Ltd. v. George Roper and Charles Henry Wallroth. At page 136, their Lordships have observed that a company is free to contract with an applicant for its shares; and when he pays in cash the nominal amount of the shares allotted to him, the company may at once return the money in satisfaction of its legal indebtedness for goods supplied or services rendered by him. That circuitous process is not essential. It has been decided that under the Act of 1862, share may be lawfully issued as fully paid up for consideration which the company has agreed to accept as representing in money's worth the nominal value of the shares. At another stage, it has been observed that not only may a share be allotted as fully paid up in respect of property, goods or services received by the company, but the courts will not inquire into the adequacy of the consideration, and certainly have not required it to be proved that the consideration given was equivalent in cash value to the nominal amount of the shares. Reference may also be made to Hilder v. Dexter. In that case, the company raised necessary working capital by issue of one-half of the share capital for cash, the other half being used for the purpose of payment in shares credited as fully paid up for the concessions to be purchased by the company. Of course, after referring to the sections of the English Companies Act, the court reached a conclusion that a transaction of this nature is not prohibited; but the important observation was that in such a transaction the shares so issued could not be said to have been issued either at a discount or for consideration other than cash. Reference was also made to Madanlal Fakirchand Dudhedia v. Shree Changdeo Sugar Mills Ltd. The subject-matter of dispute in that appeal before the Supreme Court was with regard to the agreement between the promoters and the company for paying them certain commission out of the net profits of the company. I fail to see how any portion of that judgment helps in deciding the controversy in the present case.

In view of the aforesaid discussion, in my opinion, the further issue of shares to unsecured creditors in satisfaction of their claims as provided in the scheme cannot be said to be issue of shares either at a discount or on misrepresentation or for no consideration or for consideration other than cash.

That takes me to the last attack under the head "reorganization of share capital", namely, that the scheme envisages reduction of share capital and that cannot be done without following the procedure as prescribed in section 100 onwards of the Companies Act, even if it be done as part of the scheme. I have already pointed out above that reorganization of the share capital can be carried out as a part of a scheme of compromise and arrangement under section 391 without following the whole gamut of the procedure prescribed for the same in other parts of the Companies Act. However, rule 85 makes a special departure in case of reduction of share capital when it is to be carried out as part of the scheme of compromise and arrangement. Rule 85 which I have already referred to earlier, provides that when reduction of share capital is to be effected as part of a scheme of compromise and arrangement, procedure prescribed for the same in the Companies Act and Rules should be carried out as stated earlier. This provision is made for very good reasons. It unmistakably indicates that reorganization of share capital can be brought about as part of the scheme of compromise and arrangement. But even if it is to be done as part of the scheme of compromise and arrangement this special provision in rule 85 enjoins a duty to carry out the procedure contained in section 100 onwards of the Companies Act. Ordinarily, reduction of share capital affects members of the company and it can be brought about by a compromise or arrangement between the company and its members ignoring the creditors. Now, if reduction of share capital involves repayment of a part of paid up capital or extinguish or reduce the liability on any of the shares in respect of unpaid share capital it would adversely affect the creditors. Yet the creditors would have no voice in the matter. If the procedure as provided in section 100 onwards has got to be carried out the court could not sanction reduction of share capital unless the creditors are heard and provision is made for the creditors who object to the reduction. However, if the reduction of share capital does not involve either diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid up capital, the court can sanction the same without reference to the creditors. The creditors in such a case would not even be entitled to object to the proposed reduction as provided in section 102. In the instant case, admittedly, the reduction of share capital is by way of cancellation of share capital which is lost or is unrepresented by available assets. In such a case, creditors, even in a reduction simpliciter, are not entitled to object and it makes no difference if reduction is brought about by following the procedure prescribed in section 100 onwards or by way of a scheme of compromise and arrangement. Thus, if it can be done in a given set of circumstances as part of a scheme of compromise and arrangement, it has been properly done in this case and while sanctioning the scheme ipso facto the reduction of share capital ought to be confirmed.

I am however prepared to proceed on the assumption that even if the proposed scheme of compromise and arrangement envisages reduction of share capital which is lost or is unrepresented by available assets the same cannot be done except by following the procedure specifically prescribed in section 100 onwards of the Companies Act. It is, therefore, necessary to find out whether the procedure therein prescribed has been carried out by the company or not. There is nothing objectionable in the company proposing a scheme of compromise and arrangement simultaneously proposing reduction of share capital and both can be considered and approved simultaneously. This is borne out by the observations in In re Tata Iron and Steel Co. Ltd. In that case it was contended that the scheme which effects alteration in the memorandum or articles of association without proceedings having been taken under the Act in the manner laid down by the Act for the purpose of effecting such an alteration cannot be sanctioned unless separate proceedings are taken for alteration in the memorandum and articles of association. Negativing this contention, it was held that where the Act lays down express procedure for altering the memorandum it is doubtful whether it is not necessary to follow that procedure before applying for sanction under section 120, but where that is not so, the court can under section 120 sanction the scheme which alters the memorandum. In In re Katni Cement and Industrial Co. Ltd. a scheme of amalgamation was proposed between the said company and merger of all the cement companies to be named as Associated Cement Companies Ltd. Before this merger could be made it became necessary to reorganize the share capital and alter the rights conferred by the memorandum of association upon different classes of shareholders in the capital of the said company. This was proposed as a part of the scheme of amalgamation under section 153 of the Companies Act, 1913, which is pari materia with section 191 of the Companies Act, 1956. It is observed that the court under section 153 can sanction a scheme, even though it involves acts which, apart from such provisions, would be ultra vires the company; but this rule is subject to the limitation that if the Companies Act contains express provision enabling the doing of any act in a particular way, the provisions of the enabling section, and not those of section 153, must be followed. Relying on this observation, it was urged that if there is provision for effecting' reduction of share capital, it must be followed to the exclusion of section 391. Reference was also made to Bengal Bank Ltd. v. Suresh Chakvavarthy, wherein it has been observed that a scheme involving reduction of capital must be carried out in accordance with the statutory provisions relating to reduction. Reference was also made to In re Bharati Central Bank Ltd. wherein it has been observed as under:

"....where the Act expressly prescribes a special procedure for reduction of capital, e.g., by section 55 and the several sections following it, a scheme involving a reduction of capital, such as the one now before me does, cannot be sanctioned unless the procedure for reduction of capital has also been followed. Form No. 774 in Palmer's Company Precedents, 15th edition, Part I, page 1264, shows that the reduction of capital and scheme may be considered by the shareholders at one and the same meeting and separate meetings are not necessary and that the court may, by one and the same order, sanction a scheme in conjunction with reduction of capital, that is to say, under section 55 confirm the special resolution for reduction of capital, and, under section 153, sanction the scheme. If, however, the requirements of section 55 and other sections have not been complied with, the court may direct the application for sanction to stand over in order to enable the company to advertise the petition and otherwise comply with the requirements of the Act for reduction of capital, as was done in In re Cooper ."

It does appear well settled that where the scheme of compromise and arrangement comprises within its ambit reduction of share capital, the procedure for reduction must be gone through but if it is shown that the procedure prescribed under section 100 onwards has been carried out simultaneously while submitting the scheme for approval of the creditors and members, the court can, while sanctioning the scheme, sanction reduction of share capital. The important thing to find out would be whether the procedure for reduction of share capital wherever it is mandatory has been strictly carried out and wherever it is directory has been substantially complied with.

Before one can find out as to what exact procedure should be followed for effecting reduction in share capital in a given case, it must be found out how the company proposes to reduce the share capital. The share capital of a company can be reduced in three distinct ways as set out in section 100. The. company for effecting reduction of share capital may extinguish or reduce the liability of any of its shares in respect of share capital not paid up; either with or without extinguishing or reducing liability on any of its shares cancel any paid up share capital which is lost, or is unrepresented by available assets; or with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company. The reduction of the share capital can be effected by a special resolution at a general meeting which must be sanctioned by the court. Section 101 provides that, if the proposed reduction of share capital involves either diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid up share capital, the provisions therein prescribed shall have effect, subject to the powers of the court having regard to the special circumstances in the case to direct that the provisions of sub-section (2) shall not apply as regards any class or classes of creditors.

In the present case the share capital is not reduced by extinguishing or reducing the liability of any of the shares of the company, in respect of the capital not paid up or by paying off any paid up share capital which is in excess of the wants of the company. The reduction is effected by cancelling the paid up capital which is lost or is unrepresented by available assets. When the capital is reduced by cancelling any paid up share capital which is lost or is otherwise unrepresented by available assets, it is not mandatory to follow the procedure prescribed in sub-section (2) of section 101 unless the court so directs. The procedure prescribed under sub-section (2) of section 101 requires service of the notice of the petition filed for confirming the reduction of capital on every creditor of the company affected by reduction and who is entitled to object to the reduction. The procedure goes so far as to make provision by order of the court for payment to the dissenting creditors. That procedure is mandatory, where the proposed reduction involves diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid up share capital. That is not the case here. It is common ground that reduction is by way of cancellation of the paid up share capital which is lost or is unrepresented by available assets. Unless, therefore, the court otherwise directs, the procedure prescribed under sub-section (2) of section 101 is not mandatory in this case. Therefore, in order to effect reduction of share capital by way of cancellation of paid up share capital which is lost or is unrepresented by the available assets, the company will have to adopt a special resolution to be styled as resolution for reducing the share capital in a general meeting and then apply for confirmation of the reduction of share capital. For the reasons hereinbefore mentioned, I will hold that the company has given notice of 21 days' duration and the notice convening the meeting served upon the members disclosed the resolution that, while approving the scheme, the members should approve the reduction of share capital. Resolution approving the scheme has been passed with statutory majority. The only question would be whether the intention to move the resolution as special resolution in a general meeting to be attended by the ordinary shareholders and preference shareholders is set out in the notice convening the meeting or meetings. The reasons set out above while considering the case of issue and allotment of further share and the provision contained in section 81(1) and 81(1A) would mutatis mutandis apply here. I would, therefore, hold that the members of the company in a general meeting approved reduction of share capital by a special resolution which has been passed by statutory majority and while approving the scheme the members simultaneously approved reduction of share capital by a special resolution. Therefore, the procedure prescribed in sections 100 and 101 has been carried out by the company and section' 102 would not be attracted and therefore while sanctioning the scheme the court can sanction the reduction of share capital. I would, therefore, hold that the mandatory procedure prescribed for reduction of the share capital has been strictly complied with. Therefore, the company has carried out the procedure prescribed for reduction of share capital and the same can be simultaneously confirmed while sanctioning the scheme which I hereby propose to do.

I may notice the last submission of Mr. Vakil under the head of "reorganization of share capital". A very feeble attempt was made to urge that the company cannot reduce preference share capital. Mr. Vakil approached the problem from a number of angles such as that by reduction of preference share capital without wholly extinguishing the ordinary share capital, the holders of preference shares who are entitled to preferential payment from the assets of the company in winding up are relegated to the extent of cancellation of part of preference share capital behind the ordinary shareholders which can never be done. It was also urged that an ordinary shareholder would be paid Rs. 250 from the assets of the company in winding up without paying full amount of Rs. 100 to the preference shareholders which holder of the preference shares would be entitled to receive in the distribution of the assets of the company. In my opinion, there is no substance in this contention. The provision in the Companies Act at the relevant time showed that the company could have two kinds of share capital— ordinary share capital and preference share capital. Section 100 provides that subject to the confirmation by the court, a company limited by shares, may if so authorised, by its articles by a special resolution reduce its share capital in any way. Section 100, therefore, enables the company to reduce its share capital. The word "share capital" is a genus of which "equity and preference share capital" are species. If the company has power to reduce its share capital as provided in its articles of association, it is implicit therein that it can reduce both ordinary share capital as well as preference share capital unless specific provision to the contrary is made. Article 10 permits the company to increase its share capital and article 7 authorises the company to reduce its share capital by special resolution subject to confirmation by court and subject to the provisions of sections 100 to 104 of the Companies Act. Therefore, this company has retained to itself powers to reduce its share capital—meaning thereby that it can reduce both its ordinary and preference share capital—and there is no express provision to the contrary which says that the preference share capital cannot be reduced till the whole of the ordinary share capital is extinguished. Therefore, there is no substance in the contention that preference share capital can never be reduced.

Considering the matter from all the aspects, there is no substance in the contention that the reorganization of share capital as contained in the proposed scheme of compromise and arrangement cannot be given effect to. In my opinion, the company has complied with the provisions of law and reorganization of share capital can be confirmed as part of the scheme.

Re. Ground No. 5—The next ground of attack of Mr. Vakil was that in the absence of proper directions for convening separate meetings of different classes of creditors and members of the company, appropriate meetings of distinct classes of members and creditors were not held and, therefore, it is not possible to say that the proposed scheme has been approved by requisite majority of different classes of creditors and members. When a scheme of compromise and arrangement is proposed between the company and its creditors or any class of them; or between the company and its members or any class of them, the party sponsoring the. scheme must move the court for proper directions by the judge's summons under section 391 for convening the meetings of different classes of creditors and members. It is at this stage that proper classification of members and creditors must be made. There is little difficulty in defining different classes of members. A formidable difficulty arises in deciding and defining different classes of creditors.

When the judge's summons is taken out for seeking directions for convening meetings a duty is cast on the company to put proper materials before the court so that the court may give proper directions for separate meetings of different classes of creditors and members. If the creditors and members are not properly classified and if the meeting of the proper class of creditors and members is not separately held, the scheme approved at such meeting cannot be sanctioned, vide Court Practice Note in (1934) Weekly Notes 142. The responsibility for determining what creditors are to be summoned to any meeting as constituting a class is of the applicant company and if meetings are incorrectly convened or constituted or an objection is taken to the presence of any particular creditor as having interests competing with the others such objection if successfully taken at the hearing of the petition for sanctioning the scheme the company must take the risk of having it dismissed.

It is always a moot question what constitutes a class. Buckley on the Companies Ads, 13th edition, page 406, has observed that it is a formidable difficulty to say what constitutes a "class" of creditors. The creditors composing the different classes must have different interests. When one finds a different state of fact existing among different creditors which may differently affect their minds and their judgment, they must be divided into different classes. "Class" must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest (vide Sovereign Life Assurance Co. v. Dodd). Speaking very generally, in order to constitute a class, members belonging to the class must form a homogeneous group with commonality of interest. If people with heterogeneous interests are combined in a class, naturally the majority having common interest may ride rough shod over the minority representing a distinct interest. One test that can be applied with reasonable certainty is as to the nature of compromise offered to different groups or classes. The company will ordinarily be expected to offer an identical compromise to persons belonging to one class, otherwise it may be discriminatory. At any rate, those who are offered substantially different compromises each will form a different class. Even if there are different groups within a class the interests of which are different from the rest of the class or who are to be treated differently in the scheme, such groups must be treated as separate classes for the purpose of the scheme. Broadly speaking, a group of persons would constitute one class when it is shown that they have conveyed all interest and their claims are capable of being ascertained by any common system of valuation. The group styled as a class should ordinarily be homogeneous and must have commonality of interest and the compromise offered to them must be identical. This will provide rational indicia for determining the peripheral boundaries of classification. The test as stated earlier would be that a class must be confined to those persons whose rights are not so similar as to make it impossible for them to consult together with a view to their common interest.

In this case, the court gave directions on the judge's summons taken out under section 391(1). The directions were to the effect that separate meetings of ordinary shareholders, preference shareholders, secured creditors and unsecured creditors of the company should be called on the dates mentioned in the notice. The court, thus at the instance of the company, directed four separate meetings to be held. The ordinary shareholders themselves will form one class; so also the preference shareholders will form one class. In the case of each of them the compromise offered to each member belonging to the class is identical. Similarly, the meeting of the secured creditors is also properly directed to be held. The real difficulty arose with regard to the meeting of the unsecured creditors. Of course, Mr. Vakil has attempted to urge that even in respect of the meeting of preference shareholders, directions are not proper. But I do not see much substance in it for the reasons to be presently mentioned. So also, I do not see much substance with regard to the directions given for holding the meeting of secured creditors. It was very vehemently urged that there was a conglomeration of persons with heterogeneous interest who were grouped together in the class of unsecured creditors. Generally speaking the creditors of the company should be divided into three different classes, viz., secured creditors, preferential creditors and unsecured creditors. The workers of the company each to the extent of the first Rs. 1,000 of his claim in winding up, would be a preferential creditor and indisputably they would form a separate and distinct class. They were grouped together with other unsecured creditors. I shall separately deal with the objection in respect of each meeting raised by Mr. Vakil.

As per the directions given by the court, a separate meeting of ordinary shareholders of the company was convened. In my opinion, equity or ordinary shareholders each holding fully paid shares of the company will form a separate class by themselves. They will also form a separate class in view of the identical compromise offered to them. It was however urged that there might be some creditors who may also be shareholders and their interest will conflict with the interest of shareholders who are not creditors and they should form a separate class. It was also urged that the managing director, Linubhai Banker, and ex-director, Gopaldas P. Parikh, should, form a separate class as also Indequip group of companies should also form a separate class. At page 244 of the affidavit in reply, the shareholding of Linubhai and his relation, Gopaldas P. Parikh, and the company in which Gopaldas P. Parikh is interested has been set out and it is stated that out of the total of 788 ordinary shares, 424 are held by these persons and they form a separate group. It is difficult to understand how the interest of these shareholders is different from the other shareholders. But it was urged that Indequip group of companies are very big creditors of the company and they will be supporting the proposal for converting half of their claim in the share capital so as to clamp down their octopus hold on the company and therefore they would be vitally interested in supporting the scheme and should form a separate class. Again, I see no substance in this contention. The compromise offered to the ordinary shareholders, whether creditor or not, is the same as any other shareholder. Therefore, in my opinion, the ordinary shareholder will form a separate class and proper directions in this behalf are given.

For the reasons which are mentioned above, in my opinion, there is no substance in the contention that all the preference shareholders will not form a class by themselves. In fact all the preference shareholders of the company would form a separate and independent class and their meeting is properly convened.

The Union Bank of India and the Regional Provident Fund Commissioner as representing the Central Board of Trustees are secured creditors of the company. They will certainly form a class. But it was urged that Indian Electro Chemicals Ltd., Dyestuffs and Chemicals Private Ltd., Indequip Ltd., Messrs. Amarshi Damodar and Messrs. Atul Cotton Traders became secured creditors by virtue of charges created in their favour by the decrees obtained by them against the company and, therefore, they would be secured creditors and should have been grouped with the Union Bank of India and the Regional Provident Fund Commissioner. When the meeting of the secured creditors was held on October 6, 1968, seven creditors were present including the Union Bank of India, the Regional Provident Fund Commissioner and the aforementioned 5 creditors. The chairman has reported that at the commencement of the meeting the bank took objection to any other creditor attending the meeting on the ground that there was no other secured creditor of the company holding pari passu charge on the assets of the company with the bank and this objection was submitted in writing to the chairman. As on that date the charges created by the decrees in favour of the aforementioned 5 creditors were subsisting, obviously those five creditors would be secured creditors. Before the chairman could decide the objection raised, it appears that all the secured creditors who were present requested the chairman to direct that in view of the objection raised, and in view of the statement made by the representatives of the Indequip group of companies, which would include Indequip Limited, Indian Electro Chemicals Ltd., Dyestuffs and Chemicals Pvt. Ltd., that they would attend the meetings of secured and unsecured creditors but their votes in number and in value should be taken into consideration at the meeting of the unsecured creditors subject to the approval of the court. A direction to that effect has been given by the court. As a matter of fact, the votes of the aforementioned creditors, who at one stage claimed to be secured creditors, have not been taken into consideration at the meeting of secured creditors in view of the directions issued by the court. It should be so in view of certain later developments. The aforementioned five creditors have relinquished the charges created in their favour by the decree as also the charges are not registered as required by section 126 of the Companies Act, and are not now likely to be registered and they have become void. Obviously, therefore, the aforementioned 5 creditors would be unsecured creditors and would certainly not be entitled to attend the meeting of the secured creditors. The report of the chairman also shows that they did not vote at the meeting of the secured creditors and, in my opinion, they have been rightly grouped with the unsecured creditors. The Union Bank of India and the Central Board of Trustees represented by the Regional Provident Fund Commissioner are undoubtedly secured creditors of the company and they would form a single class and their meeting is properly convened.

That takes me to the meeting of unsecured creditors convened under the directions of the court. Mr. Vakil took serious exception to grouping together all the workmen of the company and other unsecured creditors some of whom may be suppliers of goods and some of whom may be depositors or persons who had advanced cash loan to the company, in one class. There is considerable force in this contention of Mr. Vakil. In the affidavit filed by Chandulal Hiralal Banker, at page 208 he has stated that in the context of a scheme of compromise or arrangement between the company and its creditors, the creditors of a company can be divided into at least three broad classes—secured creditors, unsecured creditors and preferential creditors. In Palmer's Company Law, 21st edition, at page 700, it is observed that creditors can be divided into three categories (which may themselves overlap) of preferential creditors, secured creditors and unsecured creditors. It is further observed that unsecured creditors will normally form a single class except where some of them are to be treated in a manner different from the rest and have different interests which might conflict. It is unfortunate that the company did not take proper directions with regard to the convening of the meeting of unsecured creditors. In the class of the unsecured creditors, the workers of the company who, as stated earlier, would be preferential creditors, have been grouped together with other unsecured creditors. The only defect appears to be in grouping together the workers who are preferential creditors of the company with other unsecured creditors. In respect of the workers different compromise is offered while to the remaining unsecured creditors a distinct compromise is offered. That will also make them two distinct and separate classes. If the meeting is not properly convened, the scheme approved at such meeting cannot be sanctioned. If two distinct classes of creditors are grouped together in one class and if there is no material for finding out who belonged to one class and what was the result of their voting and who belonged to the different and distinct class and what was their voting, the only course open to the court would be to direct separate meetings of those two classes. But if the report of the chairman provides ample material for finding out the number of preferential creditors who attended the meeting of unsecured creditors and what was the number and value of their votes then it can be separated from the number and value of the votes of the remaining unsecured creditors and the court may proceed to examine the result of the voting as if two separate meetings are called. A view was taken by me in the case of Anant Mills Ltd. If any creditor present at the said meeting would have said that the presence of the distinct class of creditors was either oppressive or not conducive to their deliberations all such objections could have been examined on merits. No such objection is raised. The defect as far as the meeting of unsecured creditors is concerned, appears to be that the preferential and other unsecured creditors have been grouped together. The workers are preferential creditors in winding up but not otherwise who would form a separate class. Instead of remitting the scheme to separate meetings of unsecured and preferential creditors in my opinion, there is ample material in the report of the Chairman from which the votes in number and value representing the preferential creditors can be separated from the votes and value of the votes representing the other unsecured creditors. As this is quite possible and which would be worked out while considering the ground of attack that the scheme is not approved by a statutory majority in each class, it is not necessary to direct a separate meeting of preferential creditors and other unsecured creditors.

Mr. Vakil, however, urged that in fact there should have been seven separate meetings of persons who were grouped together in the meeting of unsecured creditors, viz, (a) workers of the company who would be preferential creditors; (b) Linubhai Banker & members of his family; (c) Indequip group of companies; (d) Manubhai Banker & members of his family; (e) depositors and persons who have advanced cash loan and supplied stores and cotton to the company; (f) Asia Electric Company and (g) shareholders who are also creditors and those who are not. It is undoubtedly true that the workers of the company as preferential creditors would form a distinct and separate class. But the depositors who had supplied goods and cotton to the company on credit would not form a separate and distinct class. This is so because identical compromise is offered to them. Similarly, Linubhai Banker who was the managing director and members of his family and Manubhai and members of his family who was in active management prior to January 1, 1966, who are creditors of the company, would not form a separate and distinct class. The compromise offered to them is identical with the other unsecured creditors. Asia Electric Company need not form a class because no compromise is offered to it. The Union Bank of India has agreed to pay Asia Electric Company out of the sale proceeds of the blading system supplied by the said creditor. The shareholders who are creditors are in no way in a distinct class from the shareholders who are not the creditors of the company. In my opinion, therefore, the classification suggested by Mr. Vakil is neither logical nor is based on any intelligible differentia, and has no rational nexus to the objects sought to be achieved while approving the scheme of compromise and arrangement. The broad division as stated by me earlier, and keeping in view what constitutes a class, would provide better and distinct classification. The court has ample material to find out from the report of the chairman the number and value of votes in respect of the two distinct classes of creditors grouped together and it would certainly be open to the court to do so. Therefore, there is no substance in the contention of Mr. Vakil that appropriate meetings of distinct classes of members and creditors were not held; and, therefore, it is not possible to say that the proposed scheme has been approved by requisite majority of different classes of creditors and members. The contention must be negatived.

Re. Ground No. 6.—The next ground of attack is that a proper statement as required by section 393(1) and as directed by the court's order dated 26th June, 1968, in Company Application No. 23 of 1968 was not sent along with the notice convening the meetings of members and creditors of the company.

Section 393 reads as under:

"393. Information as to compromises or arrangements with creditors and members.—

(1) Where a meeting of creditors or any class of creditors, or of members or any class of members is called under section 391,—

(a) with every notice calling the meeting which is sent to a creditor or member, there shall be sent also a statement setting forth the terms of the compromise or arrangement and explaining its effect; and in particular, stating any material interests of the directors, managing director, managing agent, secretaries and treasurers or manager of the company, whether in their capacity as such or as members or creditors of the company or other wise, and the effect on those interests, of the compromise or arrangement, if, and in so far as, it is different from the effect on the like interests of other persons; and

(b) in every notice calling the meeting which is given by advertisement, there shall be included either such a statement as aforesaid or a notification of the place at which and the manner in which creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid.

(2) Where the compromise or arrangement affects the rights of debenture-holders of the company, the said statement shall give the like information and explanation as respects the trustees of any deed for securing the issue of the debentures as it is required to give as respects the company's directors.

(3) Where a notice given by advertisement includes a notification that copies of a statement setting forth the terms of the compromise or arrangement proposed and explaining its effect can be obtained by creditors or members entitled to attend the meeting, every creditor or member so entitled shall on making an application in the manner indicated by the notice, be furnished by the company, free of charge, with a copy of the statement.

(4) Where default is made in complying with any of the requirements of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees; and for the purpose of this sub-section any liquidator of the company and any trustee of a deed for securing the issue of debentures of the company shall be deemed to be an officer of the company:

Provided that a person shall not be punishable under this sub-section if he shows that the default was due to the refusal of any other person, being a director, managing director, managing agent, secretaries and treasurers, manager or trustee for debenture-holders, to supply the necessary particulars as to his material interests.

(5) Every director, managing director, managing agent, secretaries and treasurers or manager of the company, and every trustee for debenture-holders of the company, shall give notice to the company of such matters relating to himself as may be necessary for the purposes of this section; and if he fails to do so, he shall be punishable with fine which may extend to five hundred rupees."

One of the directions which the court gave while giving directions for convening meetings in Company Application No. 23 of 1968, was that the advocate for the company should file in the court within five days a form of advertisement, notice and the statement required by section 393 to accompany the notice to be addressed to members and creditors of the company. The first question is what should be the contents of the statements required by section 393. The statement under section 393 must contain the terms of the compromise and arrangement simultaneously explaining its effect on certain interests. It must particularly contain any material interests of the directors, managing director, managing agent, secretaries and treasurers or manager of the company whether in their capacity as such or as members or creditors of the company or otherwise, and the effect on those interests of the compromise or arrangement if, and in so far as, it is different from the effect on the like interests of other persons. The whole of the scheme of compromise and arrangement was annexed to the notice convening the meeting. The statement as required by section 393 annexed to the notice, does explain its effect on the interest of the creditors and members. At the relevant time, there were no managing agent, secretary, treasurer or manager of the company. Therefore, the company was obliged to disclose material interests of the directors and managing director in their capacity both as director and managing director and also as member or creditor of the company and the effect of the scheme on their interests only in so far as that effect is different from the effect on the like interests of other persons. The scheme directly did not have any effect on the interests of the directors either as director or as a member or creditor in a manner different from the manner in which the scheme would have effect on the interest of other creditors and members. The interest of the managing director as creditor of the company is set out in paragraph 7 of the statement and it may be stated that the effect of the scheme on his interests is identical as the effect on the interest of other creditors and members of the company, if the scheme is sanctioned. Therefore, a mere perusal of the statement annexed to the notice would show that it conforms with the requirement set out in section 393(1)(a). The essential requirement is that the creditors and members who are to assemble in the meeting should have advance information of the proposed scheme of compromise and arrangement and its effect on their interest as members and creditors. As the whole of the proposed scheme was annexed to the notice, anyone having a bare perusal of the scheme would be able to find out what was intended to be done by the scheme of compromise and arrangement and what would be its effect on his interest as creditor or member of the company. Therefore, the first part of clause (a) of section 393(1) is fully complied with. In respect of the latter part of clause (a), it must be stated that the material interest of director and managing director in their capacity as such or as a creditor or a member of the company will have to be stated in the statement; but the effect of the scheme on their interest will have to be disclosed to the extent that effect differs from the effect on the like interest of other creditor and member that would be made by the scheme. If there is no difference, it is not essential that the effect of the scheme on the interest of director and managing director and others need be set out in the statement. In order that the statement accompanying the notice may conform to the requirement of section 393, what should be its content has been considered by Miabhoy J. (as he then was) in In re Sidhpur Mills Co. Ltd. It has been observed in this connection as under:

"In my judgment, the true legal position is that it is the duty of every officer of the company and the company to acquaint himself or itself with the material interests of every other concerned person, such as the director, managing partner or manager of the company, and to mention that interest and to explain its effect in the statement. That is the primary duty which has been cast upon the concerned persons....... In my judgment, therefore, the true construction of clause (a) to section 393 of the Indian Companies Act is that it requires the material interests which every person concerned possesses, not only in the company, but also in the scheme, to be stated by all the other persons concerned and if the latter part of clause (a) applies, then, the effect thereof must also be mentioned."

After referring to the aforementioned observations Mr. Vakil raised four-fold objection to the statement which was annexed to the notice. Before I refer to these objections, the recitals made in the statement may be briefly referred to. In paragraph (1) it is mentioned that the copy of the scheme of compromise and arrangement is annexed to the notice. In paragraph (2) it is stated that the company is in serious financial difficulties and as against the total assets of Rs. 1,26,54,147 its present liabilities are to the tune of Rs. 1,30,89,493. In paragraph (3) it is stated that several winding up petitions are filed in the High Court and as the company is unable to meet with its liabilities, the court in all probability may direct the winding up of the company. In paragraph 4 it is stated that if the company is ordered to be wound up and is sold as a running concern, it may not fetch more than 17 to 20 lakhs of rupees, as disclosed by the experience of selling Anant Mills of Ahmedabad and Rajratna Mills. It is further stated that prior to the present management, the company was being managed by the managing agency firm of Hiralal Trikamlal & Sons and when the board of directors took over the management of the company, there were accumulated losses of Rs. 62.43 lakhs. It is also stated that the machinery of the company is old and worn out and requires renovation and looking to the heavy losses, it is not possible to carry out renovation. In paragraph (5) it is stated that, in the circumstances, the board of directors have proposed a scheme of compromise and arrangement. In paragraph 6 it is stated that the share capital of the company is to be reduced and portion of dues of the creditors is to be converted into share capital and balance is to be frozen for a period of two years, whereafter it would be paid by instalments and, by this process, the company would be able to pay up its dues by 1970. In paragraph 7 it is stated that the managing director is a creditor of the company to the extent of Rs. 3,00,000 and he has agreed to convert 50 per cent, of his dues into share capital and has agreed to the payment of the balance by yearly instalment of Rs. 38,000 after 1972. In the last paragraph it is stated that the company proposes to scrap Unit No. II and the price realised on the sale of the scrap would provide some working capital and also enable the company to pay partly some of the dues of the creditors as detailed in the scheme. This statement is signed by Mr. R.L. Dave, in his capacity as Chairman appointed for the meeting, and Additional Registrar, High Court of Gujarat, Ahmedabad.

The first objection of Mr. Vakil to this statement is that the statement is not settled by the Registrar as required by the order of this court dated 28th June, 1968. The order on the judge's summons seeking directions for convening meetings under section 393(1) is to be drawn up in Form No. 35. The order in fact is drawn up in Form No. 35 and one of the directions thereby given is that the advocate for the company should file in the court within the prescribed time, the draft form of advertisement, notice and statement to accompany the notice and the same should be settled by the Registrar of the court. It was urged that the statement may have been submitted by the company but it is not settled by the Registrar. It was urged that specific contention has been raised in the affidavit in reply that the statement is not settled by the Registrar and there is no denial thereof and that the perusal of the statement would show that, at any rate, it is not settled by the Registrar. There is no substance in this contention. Rule 2(11) of the Companies (Court) Rules, 1959, defines "Registrar" to mean, in the the High Court, the Registrar of the High Court, and includes among others such other officer as may be authorised by the Chief Justice to perform all or any of the duties assigned to the Registrar under the Rules. The Honourable Chief Justice has authorised the Additional Registrar of this High Court to perform all or any of the duties assigned to the Registrar under the Rules. Therefore, the Additional Registrar will have all powers conferred on the Registrar under the Rules. In this case Mr. R.L. Dave who was appointed Chairman of the meeting is Additional Registrar of the High Court and to whom the work under the Companies Act is assigned by the Honourable Chief Justice and, therefore, the Additional Registrar would have to perform the functions of the Registrar and, therefore, he would have to settle the statement. When the statement is signed by the Additional Registrar in his said capacity, it can be said that he has settled the same. Mr. Vakil, however, urged that the statement appears to have been prepared by the company and the Additional Registrar has not applied his mind to the contents of the statement with the result that false and misleading statements have crept into the statement and it is a case of non-application of mind. In fact direction given by the court shows that the statement in the first instance has to be furnished by the advocate of the company and there is nothing on the record to show that it was not furnished by the advocate of the company. The Additional Registrar having signed it would mean that he has settled the same. Therefore, the direction has been properly complied with.

The next objection of Mr. Vakil was that this statement under section 393 ought not to have been signed by the Additional Registrar as Chairman of the meeting, because the Additional Registrar is an officer of the court and the statement issued under his signature was likely to convey a wrong impression to the members and creditors that the factual averments made in the statement had the sanction of the court. It is true that the Additional Registrar was not well advised in signing this statement. When a statement containing factual averments is signed by an officer of the court judgment of the recipient of the statement was likely to be influenced by the fact that the factual averments made in the statement have been sanctioned by the court. Therefore, such a statement ought not to have been signed by the Additional Registrar. But the mischief which was likely to be perpetrated by this statement having been signed by the Additional Registrar has been nullified by the direction given by the court in Company Application No. 55 of 1968 filed by Chandulal Hiralal Banker on behalf of his principals praying for a direction that the Additional Registrar and Chairman appointed to preside over the meetings should withdraw the statement issued under his signature and to send a fresh statement as required by section 393. A further prayer was made that till the said company application is disposed of the Chairman may be restrained from holding meetings. While rejecting this application Mehta J. on 30th September, 1968, gave an oral direction that the Chairman at the inception of each meeting should inform the creditors and members as the case may be present and attending the meeting that even though the statement sent to them is signed by him he does not vouchsafe the truth of the factual averments made therein and no inference should be drawn from the fact that the statement is signed by the officer of the court. He was further directed to explain that contents of the statement were not either true to his own knowledge or were not the view of the court; but they were factual averments made and view expressed by the sponsors of the scheme. Under the directions of Mehta J. the Chairman made this clarification at the inception of each meeting. He has so stated in his report submitted to the court. Therefore, no damage is done by the error committed by the court officer in signing the statement annexed to the notice convening the meeting.

It was next contended that this statement contained various false and misleading statements and further contained some averments and recitals for carrying on propaganda in favour of the scheme. It was urged that while complying with the statutory requirements, the company utilised the opportunity and the forum for carrying on propaganda in favour of the scheme so as to prejudicially influence the judgment and decision of the creditors and members who were to attend the meetings. It was urged that material facts were suppressed with ulterior end in view of obtaining approval of the scheme by the members and creditors. Mr. Vakil took serious exception to the averments in the statement that Anant Mills and Rajratna Mills of Petlad have been sold for an amount varying from 12.50 lakhs to Rs. 20 lakhs. I fail to see how exception can be taken to these averments because it is not suggested that these facts are untrue. It was further contended that the averments in the statement that the previous management was responsible for the loss suffered by the company to the tune of Rs. 62.43 lakhs (sic). Even Mr. Vakil could not urge that the statement as a fact is not true. In fact there is good evidence to show that the company had suffered loss to that extent till January 1, 1966, when the management changed. But it was urged that further loss suffered by the new management when they came to power from January 1, 1966, ought to have been set out. The omission to make certain statement, not required by law to be made, could not vitiate the statement nor the maker of the statement could be charged with making false or misleading statement on that account. It was then urged that the interest of family members of the managing director in the company as well as the effect on such interest of the scheme have not been set out in the statement. Section 393 only requires that the statement should contain material interest of the managing director and others set out in the section and not of the friends and relations of the managing directors and the other concerned persons: vide In re Sidhpur Mills Co. Ltd. But Mr. Vakil took a very serious exception to the averment contained in the last para. of the statement that the price realised on the sale of the scrap of Unit II of the mills would provide some working capital. It was very vehemently urged that the cash-flow statement annexed to the scheme shows that the company expects to realise Rs. 14 lakhs by sale of the scrap of Unit No. II of the company's mills and it further shows that Rs. 14 lakhs are to be forthwith paid to the secured creditors of the company, namely, Union Bank of India and Central Board of Trustees of the Provident Fund. It is true that the amount realised by the company by sale of scrapping of Unit No. II is to be appropriated towards the discharge of the liability of the company to its secured creditors, namely, Union Bank and the provident fund authorities. It is true therefore that no part of it would be available for running the mills. But the cryptic statement made in the last para. of the statement annexed to the notice would go to show that if the liability of the company to its secured creditors is discharged the company would be able to arrange for cash in view of the reduced liability of the company from other sources for running the mills. The statement made in paragraph 8 has to be read in this background. There is no suppression of the fact that the amount realised by sale of the scrap is to be utilised towards discharging the liability because it is so stated in the cash-flow statement annexed to the scheme. In my opinion, therefore, there is no substance in the contention that the statement contained false and misleading statements of facts with a view to obtain the approval of the scheme of compromise and arrangement or it prejudicially influenced the judgment of creditors and members.

The last objection of Mr. Vakil under this head of attack is that the effect of the scheme on the material interests of directors and managing director has not been clearly set out in the statement. It was strenuously urged that annexing of the statement as required under section 293 of the notice convening meeting is obligatory and absence of it would vitiate the proceedings of the meeting. It was further urged that the statement must contain in clear and unambiguous terms the effect of the provisions of the scheme on the interest of the directors and managing director so that the members and creditors may have full information about the change that would be brought about by approving the scheme, and which change may influence their judgment in the matter. It is undoubtedly true that the company is under an obligation to set out the interest of the directors and managing director in the company and the effect on their interest by the scheme—more particularly when the effect is likely to be different from the effect on the interest of like nature on other creditors and shareholders. The question then is whether the interest of the directors and managing director in the company and the effect of the scheme on such interest has been set out in the statement or not. It may at once be stated that the interest of the directors and managing director in the company has been set out in the statement. The latter part of clause (h) of section 393(1) is required to be complied with only if the effect of the scheme on the interest of the directors and managing director is likely to be different from the effect of the scheme on the like interest of members and creditors in the company. If the effect is to be the same in respect of both categories of persons, in my opinion, it is not obligatory on the company to set out the effect in the statement. But it was urged that, in this case, the effect of the scheme on the interest of the directors and managing director; is going to be of such a revolutionary character that it should have been set out in the statement. To illustrate this point, it was urged that Gopaldas P. Parikh is virtually the owner of the companies, namely, Indequip Ltd., Indian Electro Chemicals Private Ltd., Dyestuffs and Chemicals Private Ltd. and these three companies are creditors of the mills company to the tune of more than Rs. 42 lakhs. It was then pointed out that under the scheme 50 per cent, of their claim would be converted into share capital. Therefore, the effect of the scheme in the words of Mr. Vakil would be that Gopaldas P. Parikh as virtual owner of the three aforesaid companies would have shareholding in the mills company to the tune of Rs. 20 lakhs and, therefore, thereby Gopaldas P. Parikh would establish his octopus hold on the mills company to the detriment of other creditors and shareholders. It was urged that the interest of Gopaldas P. Parikh should have been set out in the statement. But I am afraid, the argument has its genesis in the obsession of the contesting creditors with Gopaldas P. Parikh which never remained concealed throughout the hearing of this petition. At the relevant time when the scheme was sponsored, Gopaldas P. Parikh was not the director of the company. He had long ceased to be director of the mills company. ' If he was neither the director nor managing director, his interest was not required to be disclosed in the statement. But it was urged that Anil Gopaldas Parikh, son of Gopaldas P. Parikh, was a director of the company at the relevant time. That, of course, is true. But Anil Gopaldas is merely a director and he had no other interest in the mills company and, therefore, there was nothing to be disclosed in respect of his interest and the effect of the scheme on his interest. The interest of the managing director, Linubhai Banker, is disclosed and the effect of the scheme on his interest is also disclosed and it can be said with reasonable certainty that the effect on his interest is in no way different from the effect of the scheme on the interest of other creditors and members. Therefore, there is no substance in the allegation that necessary disclosure as required by section 393(1)(a), later part, has not been made.

As a second limb of the argument, it was urged that the production programme, annexed with the estimated production statement, and cash flow statement, annexed to the scheme, contained misleading and incorrect information. I need not dilate upon it because I would have to advert to this submission when I consider the feasibility of the scheme.

The statement under section 393 should be drawn up as to convey to the members and creditors sufficient information so that they may be able to bring to bear upon the scheme their intelligent judgment. They must have information which would help in considering the scheme on its own merits. In my opinion, in this case, the scheme as a whole as was annexed to the notice along with various statements and statement under section 393 gave the necessary information to the creditors and members so that they may be able to intelligently deliberate upon the scheme keeping in view the commercial feasibility of the scheme and on the material supplied they were in a position to decide intelligently whether the scheme should or should not be approved. It is of course true that some further information was sought at the meeting and Mr. Surottam Hatheesing, the Chairman of the company, till the date of the appointment of the provisional liquidator, was unable to furnish that information. But the information sought was not of such a vital character that non-availability of it would have come in the way of the creditors and members deliberating upon the scheme. Therefore, considering the matter from all the aspects, in my opinion, the statement as required by section 393 was annexed to the notice convening the meetings and the provisions of section 393 have been duly complied with.

Re. Ground No. 7. —The next ground of attack was that the meetings of creditors and members were conducted in an irregular manner and, therefore, the votes recorded at such meetings cannot be relied upon to show that the scheme has been approved by the requisite majority of creditors and members. In Company Application No. 23 of 1968, the court gave directions for convening separate meetings of ordinary and preference shareholders and secured and unsecured creditors. The court also gave a direction that the notice of the meeting should be advertised and a notice convening meeting showing time, place of meeting, together with the copy of the proposed scheme of compromise and arrangement and statement required under section 303 and form of proxy, should be served by a pre-paid letter under certificate of posting to each ordinary and preference shareholder and individual notice to the creditors whose debts exceeded Rs. 1,000. Individual notices to the creditors having a claim of less than Rs. 1,000 was dispensed with. These directions have been complied with and an affidavit to that effect has been filed by the chairman who presided over the meetings. Requirements for convening proper meetings are contained in rules 69, 70, 73, 74, 75 and 76. The requirements of these rules appear to have been properly complied with. Mr. Vakil had a four-fold objection to the procedure adopted by the chairman at various meetings. The first objection is that the management failed to furnish relevant information to the creditors and members at the meeting with the result that the creditors and members had not enough information to intelligently deliberate upon the proposed scheme. It was urged that the chairman did not insist upon the management to furnish relevant information sought for by the members and creditors and, in the absence of the information, it cannot be said that the creditors and members were fully apprised of the various ramifications of the scheme and brought to bear upon the subject their intelligent judgment. At the meeting of the ordinary shareholders of the company the question was put to Mr. Surottam Hatheesing as to who were the directors of the company who had sponsored the scheme to which reply was given that the scheme was sponsored by the board of directors consisting of L.H. Banker, S.P. Hatheesing, P.H. Raval and Shri N.M. Soparkar, the last two being Government-nominated directors. Thereafter, further questions were put by the members relating to the working of the company and particularly as to the assets and liabilities of the company. Mr. Hatheesing gave replies generally dealing with the topic but he further stated that detailed figures could not be given as the provisional liquidator is in charge of the company. Thereafter some questions were put in writing and the chairman then requested Mr. Hatheesing to give replies to these questions. Mr. Hatheesing disclosed his inability to reply to the questions for want of detailed information. Unfortunately questions given in writing are not annexed to the report of the chairman. It is, therefore, difficult to find out what were the questions put and what would be the effect of the failure of the chairman of the company to give replies to the same. However, no objection appears to have been taken by the ordinary shareholders that, in the absence of information sought for, they would not be able to consider the scheme in its various aspects. Exactly similar thing happened at the meeting of the unsecured creditors. The question is whether the information sought for both by the ordinary shareholders and unsecured creditors was of such a vital nature as to affect the deliberations of the ordinary shareholders and creditors on the merits of the scheme. The first information sought was as to the assets and liabilities of the company and the exact figures have been set out in the statement annexed to the notice. Therefore, the information in this respect is certainly given both to the members and creditors. In respect of the other information sought, it is unfortunate that the exact nature of the information sought is not available and, therefore, it is not possible to come to the conclusion that in the absence of such information the creditors and members were unable to deliberate upon the scheme. The creditors and members attending did not consider the information vital enough in the absence of which they could not consider the scheme on merits. If that was the situation, they would have declined to approve the scheme. The scheme is approved except by very few creditors whose opposition is grounded on factors entirely irrelevant to the merits of the scheme and to which I would refer at a later stage. It is undoubtedly true that the creditors and members called upon to deliberate upon the scheme of compromise and arrangement should have full and fair knowledge of all the relevant facts on which they can come to an intelligent decision (vide In re Bharati Central Bank Ltd.). But, in my opinion, in the facts and circumstances of this case, it is not possible to accept that the members and creditors could not bring to bear upon the scheme an intelligent judgment for want of relevant information. The second limb of the argument was that the amendments which had been proposed to the original scheme by the secured creditors, namely, Union Bank of India and Central Board of Trustees of the Provident Fund, have not been adopted according to the correct legal procedure. The scheme as originally proposed offered a compromise to the Union Bank of India— secured creditor of the company—undertaking to pay arrears of provident fund dues to the Central Board of Trustees—the other secured creditor—by monthly instalments of s. 40,000. At the meeting of the secured creditors, the compromise offered to both of them have undergone a change. The bank agreed to accept the scheme on its own terms as suggested in the annexure to its letter dated 8th October, 1968. It must be confessed that there is a radical change with regard to the mode of payment to the bank. The amendments proposed by the bank are at page 154 of the record and the amendments proposed by the Central Board of Trustees are at page 160 of the record. The adjourned meeting of the secured creditors was held on 8th December, 1968. At this meeting, the amendments proposed by the bank were considered by the sponsors and they were accepted. The amendments proposed by the Central Board of Trustees for Provident Fund have been accepted both by the bank as well as the sponsors and they have been incorporated in the final scheme submitted to the court for its sanction. The contention of Mr. Vakil is that unsecured creditors and members approved the scheme as originally proposed and the amendments made in the scheme in respect of the compromise offered to the secured creditors have not been considered by the unsecured creditors as well as by the members of the company. According to Mr. Vakil if a comprehensive scheme of compromise and arrangement is offered to various classes of members and creditors and if some class of members and creditors approved the comprehensive scheme and if subsequently in respect of one other class the scheme is modified at the suggestion of the other class, the modified scheme should again be submitted to the remaining class of creditors and shareholders. This approach to the problem ignores the very structure of section 391 of the Companies Act. Section 391 permits the company or anyone proposing the scheme to offer compromise between the company and its members or any class of them, and between the company and its creditors or any class of them. In other words, there can be a compromise between a company and one class of its creditors or members and that compromise can be arrived at as between the company and that class of members or creditors only and it need not be approved or ratified by other class of members or creditors not affected by the same. The compromise has to be considered by the class which is to be affected by the compromise and to which the compromise is offered. Requirements of section 391 do not imply that every compromise between a company and one of its class of creditors or members should be approved and ratified by all other class before it can be sanctioned by the court. It is implicit in section 391 that the company may offer compromise to one of its class of members or creditors and approval by statutory majority of that class alone is necessary before it can be submitted for sanction of the court. The court while according its sanction to such a scheme may consider whether this compromise affects any one other than the class to which it is offered. If it does not, it is not at all necessary that such a compromise should be ratified and approved by a statutory majority by other class of creditors and members. If this is the correct interpretation of section 391, in my opinion, it furnishes a complete reply to the contention of Mr. Vakil. The company in this case has two classes of members and three classes of creditors. They are: ordinary and preference shareholders and secured creditors, preferential creditors and unsecured creditors. The company has offered compromise to each class and, in my opinion, even though the compromise is incorporated in a comprehensive scheme, in fact, each class will have particularly to consider and if thought fit to approve that part of the compromise which is offered to it. In the process that class may deliberate upon the entire comprehensive scheme of compromise and arrangement, then it would be open to that particular class to reject the compromise offered to it, if it felt that in comparison to other class of creditors and members it has not been given a fair deal or in view of the compromise offered to other class of creditors and members it may consider the compromise offered to it as unfair and disapprove the same. But even if the comprehensive scheme of compromise and arrangement is offered for consideration to various classes of creditors and members each class will have to consider and deliberate upon the compromise offered to it though in the process it may consider the feasibility of the whole scheme. But the requirements of law will be satisfied if each class deliberated upon and approved that part of the compromise of offered to it. In the present case, ordinary shareholders were offered a compromise by which the nominal value of the ordinary share was to be reduced and the same was the case with regard to the preference shareholders. Excluding the preferential creditors, namely, workers of the company, other unsecured creditors were offered a compromise that 50 per cent of their claim will be converted into share capital with the reduced nominal value of the share and the balance of 50 per cent, would be paid by instalments after a period of 2 years. Therefore, this would show that each class is offered a distinct separate compromise. The secured creditors were offered a compromise that they would be paid in full but the mode of payment would be by instalments. This aspect was before the mind of the unsecured creditors and members. If the mode of payment with regard to secured creditors as suggested in the proposed scheme is altered at the instance of the secured creditors, in my opinion, it is not necessary that before the scheme can be submitted to the court for its sanction, the amended compromise offered to the secured creditors should be ratified and approved by the unsecured creditors, preferential creditors and members of the company. Even though an all-pervasive scheme of compromise and arrangement comprising within its folds various different compromises offered to different class of creditors and members is offered for approval, in effect every class will have to consider the compromise offered to it and its judgment disclosed by its voting will have to be considered in respect of that part of the compromise affecting it. Viewed from this angle, there is no force in the contention of Mr. Vakil that the amendments which had been passed at the meeting of the secured creditors have not been passed according to the correct legal procedure. In this connection, Mr. Vakil had also contended that the amendment proposed at the meeting of the unsecured creditors were also not properly adopted. Three amendments were proposed at the meeting of unsecured creditors and members of the company relating to the payment to the Employees' State Insurance Corporation; payment to Indequip group of companies to be deferred till cotton merchants and suppliers of stores referred to in clauses 2(e) and 2(f) are paid their dues and deletion of clause 2(g) from the scheme. Clause 2(g) provides that the payment of arrears of wages and retrenchment compensation to the workers be deferred for a period of two years. These amendments were undoubtedly proposed at the meeting but it was urged that they were not properly proposed and seconded. There is no substance in this contention because the resolution passed at the meeting shows that the scheme was approved after incorporating the aforementioned amendments. Therefore, the contention of Mr. Vakil under this sub-head must be negatived.

The third limb of the argument was that Indequip group of companies and two other creditors participated in the meetings of both secured creditors and unsecured creditors and this by no canon of construction of section 391 would be permissible. This aspect has already been considered while disposing of ground No. 5. Suffice it to say that Indequip group of companies and two other creditors were not allowed to vote at the meeting of the secured creditors. In fact, except the bank and provident fund authorities the other five secured creditors having now given up their charge and charges created in their favour having now been relinquished or were void from their very inception for want of registration under section 125 they would be unsecured creditors and, therefore, the value of their vote should not be taken into consideration while considering whether the scheme has been approved by a statutory majority of the secured creditors. It may be mentioned that after the aforementioned five creditors are excluded from the category of secured creditors, only two secured creditors remain, namely, the bank and the provident fund authorities and both of them have approved the scheme and, therefore, no illegality attaches to the proceedings of the meeting of the secured creditors where the aforementioned five creditors initially attended the meeting. It must be distinctly made clear that Indequip group of companies and two other creditors were not permitted to vote at the meeting of the secured creditors and in final analysis the votes of the remaining creditors, namely, M/s. Amarshi Damodar and Atul Cotton Traders, have been excluded while computing the voting at the meeting of the secured creditors.

The last limb of the argument under this sub-head is that those creditors who are companies within the meaning of the Companies Act should have lodged their resolution and proxy as required by section 187 before they could attend and vote at the meeting. Section 187 of the Companies Act reads as under:

"187. Representation of corporations at meetings of companies and of creditors.—(1) A body corporate (whether a company within the meaning of this Act or not) may—

(a) if it is a member of a company within the meaning of this Act, by resolution of its board of directors or other governing body, authorise such person as it thinks fit to act as its representative at any meeting of the company, or at any meeting of any class of members of the company;

(b) if it is a creditor (including a holder of debentures) of a company within the meaning of this Act, by resolution of its directors or other governing body, authorise such person as it thinks fit to act as its representative at any meeting of any creditors of the company held in pursuance of this Act or of any rules made thereunder, or in pursuance of the provisions contained in any debenture or trust deed, as the case may be.

(2) A person authorised by resolution as aforesaid shall be entitled to exercise the same rights and powers (including the right to vote by proxy) on behalf of the body corporate which he represents as that body could exercise if it were an individual member, creditor or holder of debentures of the company."

It would appear from the language of section 187 that if a company is a creditor of another company within the meaning of the Companies Act, it may authorise by resolution of its board of directors any person as it thinks fit to act as its representative at any meeting of the creditors or at any meeting of members of the company held in pursuance of the provisions of the Companies Act and such a person authorised by the resolution would be entitled to attend in person and by his presence, the company as creditor would be attending the meeting in person. Such a person authorised by the resolution to represent the company would also be entitled to vote by proxy. A proxy by such a person properly lodged would be a proxy on behalf of the company. It would thus appear that where a person authorised by the resolution of a board of directors of a company attends in person it is not necessary that he should also hold a proxy properly lodged for and on behalf of the company. On a true interpretation of section 187 it appears that where a company is a creditor of another company, the first company by resolution of the board of directors may authorise any person to attend the meeting of the creditors of the other company of which it is a creditor. In such circumstances, the authority conferred by the resolution would enable the person so authorised to attend the meeting on behalf of the creditor company. Such appearance of the person so authorised would indicate the presence of the company as creditor in person looking to the language of section 187. Such a person need not hold proxy on behalf of the company. In fact he himself can nominate a representative to vote by proxy and his vote by proxy would bind the company by whose resolution he is authorised to attend the meetings. Mr. Vakil, however, urged that even if there is a resolution authorising the person to attend a meeting of the creditors of the debtor company on behalf of the creditor company, he should not only be authorised by a resolution but he should also lodge proxy on behalf of the creditor company. In my opinion, this is not borne out by the language of section 187. Mr. Vakil, however, referred to Arun prasad v. Shantilal Shankarlal Shah. The question that arose for consideration of the Supreme Court was as to the manner in which the creditor company can validly cast its vote at the meeting of the creditors held under the provisions of section 153 of the Companies Act of 1913. It would appear that the case is decided under the provisions of the Companies Act of 1913, Undoubtedly, in that case it is held that, though the person who was authorised by the directors of the creditor company to represent the said company at the meeting was present in person at the meeting, the company could not be regarded as having been present at the meeting in person, within the meaning of section 153, and, as that person was also not a proxy, the vote cast by him at the meeting was void. But in this very case the effect of the provisions contained in section 187(2) is left open. It is observed that in the Companies Act of 1956 a provision has been introduced under which a company which is a creditor of another company may by resolution of its directors authorise such person as it thinks fit to act as its representative at any meeting of the creditors of the company held in pursuance of the Act and a person authorised in this manner shall be entitled to exercise the same rights and powers (including the right to vote by proxy) on behalf of the company. Such a provision was not to be found in the Companies Act of 1913 and, therefore, this decision is not an authority for the proposition that a person authorised by a resolution of the board, before he can represent the company should also hold a proxy, especially after the introduction of section 187, and particularly subsection (2) of section 187 of the Companies Act. In my opinion, the provision contained in sub-section (2) is a complete answer to the contention of Mr. Vakil and it must stand negatived. Thus, there is no force in the contention that the meetings of the creditors and members were conducted in an irregular manner.

Re. Ground No. 8.—The next ground of attack is that even if it be held that the meetings were properly conducted, in fact, the scheme is not approved by a statutory majority. There was also an alternative submission that, assuming that the other view is possible, the court on an analysis of votes recorded at the meeting should not exercise its discretion in favour of the scheme so as to impose it on the dissenting creditors and members. I will first examine the first part of the submission that the scheme is not approved by the statutory majority of the creditors and members. Before the court can accord sanction to the scheme of compromise and arrangement, it must be approved by a majority in number representing 3/4ths in value of the creditors or class of creditors or members or a class of members, as the case may be, present and voting, either in person or where proxies are allowed by proxy. The submission is that neither the creditor nor the members have approved the scheme of compromise and arrangement by majority in number representing 3/4ths in value. Ordinary and plain meaning of section 391(2) is that the scheme of compromise and arrangement must be approved by a majority in number of each class of creditors and each class of members and the affirmative votes must represent 3/4ths in value of the shares or debt represented by the person attending the meeting either in person or by proxy.

The issued and subscribed capital of the company consists of 788 ordinary shares each of Rs. 1,000 fully paid and 1,050 redeemable cumulative preference shares each of Rs. 100. In all 117 ordinary shareholders holding 597 ordinary shares attended the meeting of the ordinary shareholders by person or proxy. Eighty-one shareholders holding 522 equity shares voted in favour of the scheme and 34 ordinary shareholders holding 72 ordinary shares voted against the scheme. The validity of votes of the two ordinary shareholders holding three shares was considered doubtful. Excluding the doubtful votes the analysis would show that 80 ordinary shareholders holding 5/8 ordinary shares cast valid votes in favour of the scheme and 32 ordinary shareholders holding ordinary shares cast valid votes against the scheme. It would immediately appear that the valid votes cast in favour of the scheme were majority in number representing 3/4ths in value of the total shares represented at the meeting by the members attending the meeting by person or proxy. Obviously, therefore, the scheme is approved by a statutory majority in the meeting of ordinary shareholders.

The meeting of the preference shareholders was attended by 71 preference shareholders either in person or by proxy holding 544 preference shares. Out of the aforementioned 71 preference shareholders present in person or by proxy 55 shareholders holding 456 preference shares voted in favour of the scheme while 16 shareholders holding 88 shares voted against the scheme. It would immediately appear that the valid votes cast in favour of the scheme were majority in number representing 3/4ths in value of the total shares represented at the meeting by the members attending the meeting by person or proxy. Doubtful votes were not taken into consideration. Obviously, therefore, the scheme is approved by a statutory majority in the meeting of preference shareholders.

The meeting of the secured creditors of the company was convened first on October 6, 1968, and was adjourned to various other days. The Union Bank of India and the Central Board of Trustees of the Provident Fund were the only secured creditors of the company and both of them have voted in favour of the scheme subject to the modifications suggested by them in respect of the compromise offered to each of them and the same has been accepted by the sponsors of the scheme and, therefore, the final scheme submitted to the court is approved by both the secured creditors which would indicate that the same has been approved by a statutory majority. It may be mentioned here that Asia Electrical India Pvt. Ltd. Company holds a charge for the price of the blading system supplied by it to the company. The said creditor claims to be the creditor of the company to the tune of Rs. 1,48,471.20 and has filed a suit to recover the said amount in the High Court of Maharashtra against the company. A representative of the said creditor attended the first meeting of the secured creditors but did not attend the subsequent meetings when the secured creditors finally voted upon the scheme. It may however, be mentioned that under the scheme Unit II of the mills of the company is to be scrapped and sold and the realization therefrom is to be shared by the Union Bank of India and the Central Board of Trustees of the Provident Fund. The scrapping of Unit No. II includes scrapping of the blading system which is part of the power plant of the company. Therefore, blading system will also be sold. Out of the price realised by the sale of the blading system the Union Bank has agreed to pay the amount payable to Asia Electric India Pvt. Ltd. Company. At any rate, it cannot be said that Asia Electric Company claiming to be secured creditor of the company has voted against the scheme. Indian Electro Chemicals Ltd., Dyestuffs and Chemicals Private Ltd., Indequip Ltd., Messrs. Amarshi Damodar and Messrs. Atul Cotton Traders had at one stage claimed to be the secured creditors. They were not recognised as such and they were not permitted to vote at the meeting of the secured creditors. In fact the charge created by the bank in their favour having not been registered by the Registrar of Companies on the date of the meeting or subsequent thereto and they having specifically relinquished the charges in their favour could by no stretch of imagination be said to be secured creditors and, therefore, they were rightly not permitted to vote at the meeting of the secured creditors. Even if they are considered to be secured creditors, they having approved and consented to the scheme, there is no negative vote at the meeting of secured creditors. It can, therefore, be said with reasonable certainty that the scheme has been approved by the secured creditors of the company by more than the statutory majority.

That takes me to the meeting of unsecured creditors. As stated earlier, the meeting of unsecured creditors was attended by the creditors who were suppliers of stores and cotton, workmen of the company and the depositors. The depositors are relations and members of the family and a few friends of the managing director, Linubhai Hiralal Banker. The total value of the debt represented by the creditors attending the meeting was to the tune of Rs. 1,11,05,004. The creditors representing the claim in the value of Rs. 94,94,502 voted in favour of the scheme. If the meeting of the unsecured creditors as a class is held to be valid, it would appear that as against the creditors representing the debts of the company to the tune of Rs. 94,94,502 who voted in favour of the scheme, only creditors representing debts to the tune of Rs. 9,52,185 voted against the scheme. Therefore, it would prima facie appear that majority of the unsecured creditors representing 3/4ths in value approved the scheme.

It was very vehemently contended that preferential creditors and unsecured creditors were grouped together in one class and, therefore, the votes cast at such an illegal meeting approving the scheme cannot be taken into consideration by the court. As stated earlier, the workers of the company would be preferential creditors; so also, the Employees' State Insurance Corporation would be a preferential creditor of the company and they should not have been grouped together with the other unsecured creditors. For the reasons stated hereinabove, the creditors of the company would fall broadly into three distinct classes, namely, secured creditors, preferential creditor of the company and they should not have been grouped together with the other unsecured creditors. For the reasons stated hereinabove, the creditors of the company would fall broadly into three distinct classes, namely, secured creditors, preferential creditors and other unsecured creditors. Separate meeting of secured creditors has been convened and they have approved the scheme. The error appears to have been committed in convening the joint meeting of preferential and unsecured creditors. But the report of the Chairman would help in finding out the debts represented by the preferential creditors and the debts represented by other unsecured creditors in the meeting of unsecured creditors. The report of the Chairman would show that out of 1955 creditors including both preferential and unsecured creditors, who attended the meeting, 1055 creditors inclusive of both the classes representing Rs. 94,91,502 voted in favour of the scheme. It would further appear from the report that the workmen of the company forming a class of preferential creditors who attended the meeting represented their claim to the tune of Rs. 36.33,400. The claim of the Employees' State Insurance Corporation against the company on that date was to the tune of Rs. 6,27,346. The workmen and Employees' State Insurance Corporation, being the preferential creditors, would form one class. It may be that as the compromise offered to the Employees' State Insurance Corporation is slightly different from the compromise offered to the workmen of the company, the workmen and the Employees' State Insurance Corporation may each form a distinct class. The remaining unsecured creditors would comprise suppliers of cotton and stores and depositors. An entirely identical compromise is offered to the suppliers of cotton, stores and depositors and, therefore, they can be conveniently grouped together in one class. Their rights are not so dissimilar as to make it impossible for them to consult each other for their own interest. Thus, the workers being preferential creditors would form one distinct class. Employees' State Insurance Corporation would form another class. The remaining unsecured creditors would form a class by themselves. The next thing is to find out the votes and value of votes cast in each class to ascertain whether in each class the scheme is approved by statutory majority. It is very easy from the report of the Chairman to find out the total number of workers present and the value of their votes. It is equally easy to find out the value of the vote of Employees' State Insurance Corporation. The composite value of the affirmative votes cast in favour of the scheme at the meeting according to the report was Rs. 94,94,502. This is inclusive of the claim of workers as preferential creditors which was to the tune of Rs. 36,33,400. If the votes of the workmen representing in value the claim to the tune of Rs. 38,33,400 is deducted from the votes representing the debt of other unsecured creditors to the tune of Rs. 94,94,502 the balance would be Rs. 58,61,202 out of which vote representing the value of the claim of the Employees' State Insurance Corporation to the tune of Rs. 6,27,346 should be deducted which would leave a balance of Rs. 52,33,756. The unsecured creditors being suppliers of stores and cotton and depositors and excluding preferential creditors who attended the meeting and voted in favour of the scheme represented the debt in the value of Rs. 52,33,756. The value of the claim of the creditors who voted against the scheme was Rs. 9,82,185. It would immediately appear that the unsecured creditors excluding the preferential creditors, namely, the workmen and Employees' State Insurance Corporation have approved the scheme by more than the statutory majority.

The workmen of the company who attended the meeting unanimously voted in favour of the scheme, and the value of their claim was Rs. 36,33,400. Similarly, Employees' State Insurance Corporation whose claim was in the amount of Rs. 6,27,346 has accepted the scheme. Thus the workmen of the company who would be preferential creditors forming a distinct class of creditors of the company have approved the scheme by more than a statutory majority. So also, the Employees' State Insurance Corporation who would be a distinct class of creditor of the company has accepted the scheme. It thus becomes crystal clear that the preferential creditors of the company have approved the scheme by more than the statutory majority.

At this stage one submission of Mr. Vakil may be noticed. It was very vehemently urged that if the preferential creditors and unsecured creditors each form a distinct class, separate meetings of each class ought to have been convened and it is not open to the court to analyze the votes at a meeting attended by such heterogeneous creditors as unsecured creditors, preferential creditors and Employees' State Insurance Corporation and arrive at a positive finding. It was further urged that it would not be possible to find out how the judgment of each class of creditors must have been affected or influenced by deliberation in such a meeting of heterogeneous creditors and it was further contended that the workers who are vitally interested in the restarting of the mills of the company must have caused an over-powering influence on the deliberations at the meeting and the judgment of other creditors would be adversely affected. The submission was that if once an error is committed in convening the meetings, nothing further can be done and either the court should ignore the decision arrived at such a meeting or at best fresh meeting with proper clarification should be convened and consideration of the scheme should be postponed till such meeting is convened and result is notified to the court. It is undoubtedly true that at the stage of giving directions under section 391 it is the bounden duty of the sponsors of the scheme to place proper materials before the court so that the court can give accurate directions for convening separate meetings of distinct class of creditors and members. It must be confessed that such a case was not taken by the company when direction for convening the meeting of unsecured creditors was given and which included within its fold grouping together of such heterogeneous creditors as preferential creditors, Employees' State Insurance Corporation and other unsecured creditors. It would have been well and good if such distinct and separate meetings were convened in respect of each class of distinct creditors. But if error was committed yet the voting at the meeting can be properly analysed to find out which was the distinct class whose separate meeting could have been called and votes of each class can be ascertained, in my opinion, such an error would not be fatal. There is absolutely no allegation that one class of creditors imposed themselves on the other class or that the majority coerced the minority into acceptance of the scheme. In the absence of slightest allegation to that effect and in the absence of any allegation that there were no free, frank and fair deliberations, in my opinion, it is not necessary to order a fresh meeting of the distinct class of creditors. If there was the slightest doubt in my mind that one class of creditors, namely, preferential creditors, by their sheer majority imposed themselves on the minority or the minority were coerced into approving the scheme, I would have certainly ordered separate meetings of preferential creditors and unsecured creditors. But the analysis of the votes would show that except the principals of Chandulal Hiralal Banker who is practically the only contesting creditor and whose stubborn opposition to the scheme is attributable not to inherent demerits of the scheme but to the personal feuds and vengeance and no other unsecured creditor representing any substantial interest opposed the scheme in the meetings of unsecured creditors, framing or the hearing of their petition, it is not necessary to order. In these circumstances, in my opinion, the analysis of the vote at the unsecured creditors' meeting after separating the preferential creditors from other unsecured creditors should be taken into consideration to find out whether the preferential creditors as a class have approved the scheme and whether other unsecured creditors as a class have approved the scheme. As stated above, the workers as being preferential creditors, the Employees' State Insurance Corporation and other unsecured creditors each as a class has approved the scheme by statutory majority and, therefore, there is no substance in the contention that the scheme is not approved by statutory majority.

The alternative submission of Mr. Vakil may now be considered. It was urged that even if it be held that the scheme has been approved by different classes of creditors and members in their respective meetings by statutory majority, the court on an appropriate analysis of voting would not impose such a scheme on the dissentient members and creditors. The submission was that the scheme is so designed as to help Gopaldas Parikh and his protege, Linubhai Banker, to cover their misdeeds and to give them unfair advantage by which they would have an octopus hold on the company. It was urged that if the scheme is approved, three companies in which Gopaldas Parikh has a controlling interest, namely, Indian Electro Chemicals Limited, Dyestuffs & Chemicals Private Limited and Indequip Limited, would be able to obtain ordinary shares of the company worth Rs. 20 lakhs and thereby they would have such a controlling voice in the affairs of the company that their misdeeds could not be brought to light and they would be able to ride rough shod over the other shareholders. It was also urged that Shardaben, Shantaben and Chandulal Banker who are contestants would be left to the tender mercy of Gopaldas Parikh and Linubhai Banker. In fact, even at the present stage, Indequip group of companies along with Linubhai Banker, and the members of his family hold 422 shares out of the total number of 738 ordinary shares of the company. If the scheme is sanctioned Indequip group of companies would be able to get allotment of shares worth Rs. 20 lakhs by conversion of their 50 per cent, claim against the company. It is not likely to tilt the balance in a different way. It cannot be said, therefore, that the scheme is designed for obtaining a controlling voice in the affairs of the company. On the contrary, if the scheme is sanctioned, number of other creditors would become holders of shares and would be able to influence the management in the affairs of the company. Therefore, on this account, the scheme cannot be rejected. Even at the cost of repetition, it must be mentioned that the scheme is opposed by a very few creditors and an infinitesimally small number of shareholders. The fact that the scheme has been approved by a requisite majority of shareholders is undoubtedly a strong argument in its favour, unless it is shown that their approval was not obtained fairly and the terms of the scheme are not such as a reasonable man may accept. The approval of a scheme by statutory majority of creditors and members is not decisive of the matter. But it is equally true that due weight should be attached to the choice indicated by the creditors and members who are vitally interested in the company and the scheme affecting the company. Further, on the analysis of the votes cast at the meeting, the salient feature that comes out to the surface is that the scheme was opposed especially by those who, apart from the merits of the scheme, are personally opposed to Gopaldas Parikh and Linubhai Banker. The feud appears to be more between the blood relations rather than between the creditors and members who have offered their best commercial judgment to the scheme on its merits. It is an inescapable conclusion that Chandulal Banker as a power of attorney holder of Shardaben, and Shantaben who is the principal contender, opposed the scheme tooth and nail not because he had the interest either of the company or creditors and members at heart but because he had to leave the active management when Gopaldas Parikh and Linubhai Banker stepped in and because of his personal vendetta against both of them. In this view of the matter it is not possible to accept the submission of Mr. Vakil that the scheme should not be imposed upon dissentient members.

Re. Ground No. 9.—The last ground of attack was that the scheme is not commercially and economically viable or feasible and is in fact unfair and unreasonable. Before I proceed to consider this contention on merits, the approach to the scheme of compromise and arrangement by the court should be made clear. How should the court approach a scheme of compromise and arrangement submitted for its sanction which is shown to have been approved by a statutory majority of creditors and members who are directly affected by the scheme. The burden, of course, of showing that the scheme is a fair and reasonable one initially lies on the petitioner. The petitioner must prima facie show that the scheme is pre-eminently fair and reasonable as a prudent and reasonable shareholder would approve of and not object to. In order to show prima facie that the scheme is fair and reasonable, it is open to the petitioner to submit that due weight must be accorded to the fact that the majority has recorded a decision in favour of the scheme and the court must not lightly ignore or set aside that decision. In In re Sidhpur Mills Co. Ltd. Miabhoy J. (as he then was), in this connection, observed as under:

"Therefore the scheme has not got to be scrutinised by the court with that much care with which an expert will scrutinise it, nor will it approach it in a carping spirit with a view to pick holes in it. If the majority is acting in a bona fide and honest manner and in the interests of the class that it purports to represent, then, if the scheme is such as a fair-minded person, reasonably acquainted with the facts of the case, as prevailing at the time when the scheme was sponsored and approved, can regard it as beneficial for those whom the majority seeks to represent, then, unless there are some strong and cogent grounds to show that the scheme was conceived, designed or calculated to cause injury to others, the court will ordinarily sanction it, rather than reject it."

This must be the approach of the court while examining the scheme and the court should, keeping in view all the aspects of the matter, prefer a living scheme to compulsory liquidation bringing about an end to a company. Reference may be made to Lawrence Dawson v. j. Hormasji Cunliffe J. has observed as under:

"The court is of course not a mere machine for registration. It will look into the proposed scheme much as a court of appeal will canvass, if asked to do so, the decision of a jury, to ascertain if there was reasonable evidence to support their verdict; but it will, I think, always also prefer a living scheme to a compulsory liquidation bringing about an end to a company, and usually without any hope of payment in full."

The court in exercising its discretion under section 321(2) must treat it as cardinal that its function does not extend to usurping the view of the members or creditors. It must look at the scheme to see that it is a reasonable one and while so doing, the court will be strongly influenced by a big majority vote and the reasons which actuated the contesting creditors in opposing the scheme. None the less it is essential that the scheme must be a fair and equitable one though it is none of the business of the court to judge upon the commercial merits which in fact is the function of the creditors and members.

Approaching the scheme from this angle, let me find out whether it is feasible and workable. It is not necessary to bring to bear upon the subject the expertise of textile magnates. The court must be prima facie satisfied that the scheme in its broad outlines is a reasonable and fair one and that it is feasible and workable. The first objection was that the estimate of receipts and outgoings made in the cash flow statement annexed to the scheme is factually incorrect and cannot be conceived even in the realm of possibility. The estimate of rent of godowns to be constructed on the land that will be vacated by scrapping of Unit II was considered exaggerated. Except making a statement in affidavit in reply that the estimate is exaggerated, no material is placed on record to reach the conclusion that the estimate is exaggerated. It was also urged that, in the year 1963, Rs. 3 lakhs will be received by way of deposits from the intending lessors and acceptance of deposit from the intending lessee would result in contravention of section 18 of the Bombay Rents, Hotel & Lodging House Rates Control Act, 1947 (hereinafter referred to as the "Rent Act"), which prohibits a landlord from receiving any fine, premium or other like sum or deposit or any consideration other than the standard rent or the permitted increases, in respect of the grant, renewal or continuance of a lease of any premises. It was also urged that acceptance of deposit from the intending lessee by the landlord for granting lease would be a penal offence. It is unnecessary to decide this point in this case because it does not directly arise for consideration. Prima facie, however, it may be pointed out that Explanation I to section 18 of the Rent Act would show that receipt of rent in advance for premises let out for the purpose other than residence would not come within the mischief envisaged in section 18. If the premises let out are for the purpose other than residence, advance rent can be taken by the landlord and if the lease is for a longer period, it would be open for the landlord to contract that the advance rent taken would be given credit for for the period which is just preceding the expiry of the lease. Such an agreement, if entered into between the landlord and tenant in respect of the premises leased for a purpose other than residence, would enable the landlord to take advance rent and also continue to recover the rent for the initial period of the lease. Therefore, even though what is styled as rent deposit-, it in effect appears to be advance rent to be taken from the intending lessee and prima facie it does not appear that such an action would be in contravention of section 18. It was also contended that Rs. 25,000 are expected to be received by sundry receipts, but there is no source disclosed. The amount is not very large and a textile mill can hope to get it by way of sundry receipts. It was, however, urged that there is no cash capital with the company and initially a large cash amount would be required for restarting the mill and if the realisation from the scrap of Unit No. II is to be paid straightaway to the secured creditors, there would be no cash capital with the company to start Unit No. I and unless the Unit No. I starts no income can be expected. In this connection, I would like to point out that Gopaldas Parikh has filed his affidavit at page 500 of the record in which he has stated that he is connected with about 24 companies and he would be in a position to arrange finances to the extent of Rs. 10 lakhs for restarting Unit No. I of the mills of the company. There is a similar affidavit of Surotam Hatheesing at page 498 who is connected with two mills and live other companies. He is also a managing director of Arvind Mills Ltd. It is nowhere suggested that these persons would not be able to provide finances as indicated by them in their respective affidavits. It is also proper to refer at this stage to another affidavit of Gopaldas Parikh in which he has stated that he would be able to arrange liquid finance to the tune of Rs. 10 lakhs for the working of the mills for two years from the date of sanctioning the scheme and that he is prepared to provide finance from his own resources and personal guarantees to be furnished by him subject to a condition that whatever additional funds are brought by him within the said period of 2 years from his resources or on his personal guarantees they should be secured against the block of the company and will have first preference of payment after the dues of the present secured creditors are paid off. At no stage, the ability of Gopaldas Parikh to provide additional finances was in any way seriously disputed before me. Looking to his connection with different companies and looking to the fact that various creditors have extended credit to the company to the tune of Rs. 74 lakhs on the personal guarantee of Gopaldas Parikh, it would be reasonable to believe that he would be able to procure finances as promised by him in his affidavit.

It was next contended that production programme annexure and estimate production statement annexed to the same are based on exaggerated action of the efficiency of the machinery of the mills and the management. It was urged that the textile machinery of the company is very old and completely worn out and would not work at the expected efficiency and the estimated production cannot be obtained. Reference in this connection was made to the observations made by the court of inquiry appointed to inquire into the closure of the mills in Inquiry Case (IC.I/67) wherein it is observed that the mills is very old with equally old machinery and that there is no other alternative but to scrap the mill. It is true that the machinery is very old; and it is also true that when both the units worked the company suffered loss and, therefore, apparently, it would appear that when one of the two units is to be scrapped the other unit could not be profitably worked. But it appears that uneconomic working of the two units apart from being the result of depreciation in the textile industry was to a considerable extent attributable to the division of the mills into two units in two separate sheds which raised labour ratio to an uneconomic level. Once Unit No. II is scrapped the other Unit can be profitably worked. An expert like Chandraprasad Desai, general manager of Arvind Group of Mills, was one of the opinion that Unit No. I can be profitably worked and estimated production can be obtained. Gopaldas Parikh consulted Chandraprasad Desai and a reply received from Chandraprasad Desai is at page 503. Annexed thereto are the monthly working of the mills and estimated production statement. Mr. Vakil compared these two statements with statements annexed to the scheme submitted to the creditors and members and tried to point out discrepancies between the two. There are some discrepancies but they are not of material nature. After all two experts are bound to differ in their estimates and unless the difference is of an unbridgeable character, it is not the function of the court to examine the scheme like that of an expert in the textile industry. Suffice it to say that Chandraprasad Desai, whose claim as an expert was not very seriously disputed and cannot be disputed, has expressed an opinion that Unit No. I can be profitably worked and that, in my opinion, along with the fact of approval by creditors and members, would be sufficient to come to the conclusion to say that the scheme is workable and feasible.

The next question is whether the scheme is a reasonable and a fair one. The scheme offers compromise of an equitable character to the members and unsecured creditors. But it was urged that the Union Bank and the Central Board of Trustees of the Provident Fund have been given an unfair advantage and they are net expected to make any sacrifice which other interested persons are called upon to make in the scheme. It was urged that the bank does not agree to reduce its claim and insists upon continuance of its security and no relief is sought to be given even in payment of interest. It was also urged that the amount to be realised from the scrap of Unit No. II would be wholly appropriated towards the payments of the dues of the Union Bank and the Central Board of Trustees of the Provident Fund. That of course is true. It must, however, not be forgotten that the Union Bank of India is a secured creditor and can remain outside winding up and prima facie it appears that if it does realise its security, nothing would be left for other creditors and members. The Central Board of Trustees of the Provident Fund have given concession inasmuch as they have agreed to give up damages payable by the company on its failure to pay the provident fund contribution and that is an important concession. Further, both the secured creditors agreed to accept payment by instalments spread out over a long period. It, therefore, cannot be said that the bank and the Central Board of Trustees of the Provident Fund are given unfair advantage in the scheme to the detriment of the interests of the other unsecured creditors and members. Now, if the scheme is sanctioned, the company is likely to be enormously benefited and obtain substantial benefit to which I would presently refer. It must be distinctly understood that the advantages sought to be extended and concession sought to be granted are subject to an important reservation that the proposed advantages and concessions would be extended or made if and only it the scheme is sanctioned. Considering all these aspects, in my opinion, the scheme is a reasonable and fair one and, on the present material, it can be said that it is commercially sound and economically viable. Therefore, it is not possible to accept the contention of Mr. Vakil that the scheme is neither fair nor reasonable nor workable.

I should like now to dwell upon the important aspect why the scheme should be approved. There are two alternatives before the court: (1) to sanction the scheme, or (2) to reject the scheme and as a necessary corollary to wind up the company by passing appropriate orders on three winding up petitions which are pending before the court. If the scheme is to be rejected the only alternative is to wind up the company; and it was urged with utmost vehemence that for an insolvant company, winding up is its inevitable fate and natural corollary. The company can at this stage be undoubtedly said to be commercially insolvent and in respect of such a commercially insolvent company, the creditor would be entitled to an order for winding up the company ex debito instias. But when in respect of such a company, a scheme of compromise and arrangement is offered, the court should, in my opinion, evaluate the position—firstly of creditors and secondly of members in winding up and in the scheme and should weigh the advantages that may accrue in either course to be adopted by the court and find out which way the balance tilts. If the matter is approached from this angle, in my opinion, the conclusion in this case is inescapable. If the company is ordered to be wound up, the liquidator would dispose of the assets of the company and will have to apply first the receipts for discharging the dues of the secured creditors and then preferential creditors and thereafter unsecured creditors; and if there is any balance, there would be pro rata distribution to the members. The present liabilities of the company are in the aggregate amount of Rs. 1,64,54,117. The company is indebted to the bank to the tune of Rs. 40 lakhs and roughly Rs. 22 lakhs are payable to the Central Board of Trustees of the Provident Fund. The company has to pay Rs. 8 lakhs to the Employees State Insurance Corporation and the preferential claim of the workers would come to Rs. 20 lakhs. Indequip Group of companies are creditors to the tune of Rs. 40 lakhs and there are other unsecured creditors to the tune of Rs. 15 lakhs. The remainder is the claim of the workers representing their non-preferential claim. If the assets of the company are sold, taking the best view of the matter, Rs. 28 lakhs may be realised by the sale of the machinery and the land may fetch, at the best available price, Rs. 35 lakhs. I have worked out the figure of Rs. 28 lakhs of the machinery on the basis that the company hopes to realise Rs. 14 lakhs by sale of the machinery after scrapping Unit No. II only. The company is the owner of the land admeasuring about 59,000 sq. yds. These are approximate estimates. It would immediately appear that the claim of the secured creditors and preferential creditors would not be paid in full by the sale of the assets of the company at the market price. After satisfying the claim of secured creditors and preferential creditors there will be no residue and the unsecured creditors are not likely to get a farthing, and even a part of the claim of the preferential creditors, in my opinion, would remain unsatisfied. Therefore, there is no vestige of a chance for the unsecured creditors to get anything towards their claim in the event the company is ordered to be wound up. Even Mr. Vakil could not by any logic work out the figures to show that looking to the present liabilities of the company towards the secured creditors and preferential creditors in the event of winding up, unsecured creditors were not likely to get even a fraction of one per cent, towards their dues. In the event of winding up the mills will be closed down and would be disposed of and, if they are disposed of by scrapping the machinery, there is no question of restarting the mill even by the purchaser. As a necessay consequence the workers would be unemployed and starvation would be their only lot. The company would be dissolved and would come to a dead end. This consequence would generally follow in the event of an order of winding up the company being made and taken to its logical end.

If, on the other hand, the scheme is sanctioned, the secured creditors and preferential creditors would be paid in full. The unsecured creditors would get 50 per cent. of their claim in the shape of ordinary shares of the company and the balance of 50 per cent. would be paid by instalments commencing after a period of two years after restarting of all the departments of Unit No. I. Unit No. I would be restarted under the scheme and would provide employment to roughly 1,000 workers. These aspects cannot be lost sight of even on a humanitarian ground. The company would be resuscitated. The debt liability of the company would be considerably reduced because the Indequip Ltd., which is the biggest unsecured creditor roughly to the tune of Rs. 40 lakhs, has agreed under a compelling necessity and not out of altruistic motive to forgo balance of 50 per cent. of its dues after recovering 50 per cent in the shape of ordinary shares of the company. This concession is made in the affidavit of Gopaldas Parikh. There is a similar concession made by Mr. Khale on behalf of Dyestuffs and Chemicals Private Ltd. which would reduce the liability of the company by another 3 lakhs of rupees. Thus the debt liability of the company would be roughly reduced by Rs. 23 lakhs. These concessions are made on behalf of Indequip Ltd. and Dyestuffs & Chemicals Pvt. Ltd. on the condition that the court sanctions the scheme. It the company is resuscitated, the members may also hope to earn dividend after a lapse of a few years. Now it must be confessed that the concession made by Gopaldas Parikh on behalf of the Indequip Ltd. and by Mr. Khale on behalf of the Dyestuffs and Chemicals Private Ltd. is not actuated by any altruistic motive because it is absolutely certain that in the event of the scheme being rejected and an order for winding up the company is being made, they as unsecured creditors are not likely to recover a farthing out of their total claim of nearly Rs. 46 lakhs. Their aporoach appears to be that when everything is likely to be lost part of it may be recovered by forgoing the other part of it. This concession is not by way of gift or as an inducement to the court to sanction the scheme. They are actuated by their approach as a man of business of sound commercial instinct. They may get 50 per cent. by agreeing to the scheme while they would lose everything if the scheme is rejected. It is under a compelling necessity that they have made this offer. Nonetheless it would be beneficial to the company. When thus the consequence that would follow in the event of sanctioning the scheme or in the event of winding up order being made directly affecting the creditors and members, undoubtedly, the balance in favour of the scheme considerably tilts and that should be a very important circumstance which would influence the court's decision while considering the scheme on its own merits.

It must also be pointed out that if the scheme is not sanctioned and an order for winding up is made, the secured creditors, namely, the Union Bank of India and the Central Board of Trustees of the Provident Fund, have declared their unequivocal intention to remain outside the winding up and they would insist on realising their security in full and, in that event, nothing would be left because the experience of this court, while considering the offers for purchase of a textile mill in this city for the last one year, shows that the price realised is hardly attractive. If the scheme is sanctioned the secured creditors have agreed to be bound by the scheme, while in the winding up, they have expressed in no uncertain terms that they would remain outside the winding up and realise their security in full. If they come under the scheme which they have agreed to do they could be paid by instalments and keeping in view some of the conditions which I propose to impose while sanctioning the scheme, the liability of the company to pay running interest may be reduced to some extent. The Central Board of Trustees of the Provident Fund have agreed to forgo damages to the tune of Rs. 6 lakhs in the event of the scheme being sanctioned. The only thing that was harped upon by Mr. Vakil was that, in the event of winding up, various inquiries can be made into the misdeeds of the ex-directors and fraudulent preferences can be avoided. I have already pointed out that the mortgage in favour of the bank and Central Board of Trustees of the Provident Fund cannot be avoided as fraudulent preferences. The charges created by decrees in favour of the other five creditors, namely, Indian Electro Chemicals Ltd., Dyestuffs & Chemicals Private Ltd., Indequip Ltd., Messrs. Amarshi Damodar and Atul Cotton Traders, have been relinquished, by way of concession in the above. The result which Mr. Vakil seeks to achieve is obtained without the order of winding up being made. Thus, giving the matter my anxious thought the advantages and benefits that are likely to accrue by sanctioning the scheme far outweigh the imaginary or productive result which Mr. Vakil thinks can be achieved in winding up. Therefore, also, the scheme deserves to be sanctioned.

Before sanctioning the scheme it is necessary to give specific directions subject to which I would accord sanction to the scheme. The court has power at the time of making an order sanctioning the scheme under section 392(1)(b) to make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement. This power can be exercised not for substituting the scheme as approved by the creditors and members but for making the scheme of compromise and arrangement effective and workable. The only pre-condition in the exercise of the power under section 392(1)(b) is that the court can make modifications for the proper working of the compromise and arrangement. In other words, the court can modify the scheme of compromise and arrangement so as to make it effective and workable. It has become necessary to exercise this power because the scheme was considered by the creditors and members prior to December, 1968, and it was hoped that it would go through in the early part of the year 1969. For various reasons, the hope has not materialised with the result that certain consequential modifications will have to be made in the scheme to make it effective and workable. Some modifications have also become necessary in order to restrict the powers of the bank and Central Board of Trustees of the Provident Fund to throw overboard the scheme at their sweet will and pleasure. The scheme gives discretion to the bank in the event of the bank in its absolute discretion feeling that its rights as secured creditors are in jeopardy or its guarantee is impaired, to take any action as a secured creditor. The scheme also gives an option to the bank and Central Board of Trustees of the Provident Fund to recover the whole amount at once if the default in payment of instalment is committed. While sanctioning the scheme if these provisions are retained, it would give veto to the bank and the Central Board of Trustees of the Provident Fund to play ducks and drakes with the scheme at their sweet will. Such a power to take unilateral action to the detriment of other interested persons bound by the scheme with a view to destory the scheme given to the bank and Central Board of Trustees of the Provident Fund, would always keep the scheme at the tender mercy of those two creditors and it would not be conducive to the healthy working of the scheme of compromise and arrangement. Therefore, I consider it just and proper for the proper working of the scheme of compromise and arrangement to direct the following modifications to be made in the scheme and, subject to these modifications, the scheme would be sanctioned.

Under the scheme, the dues of the bankers are to be paid by monthly instalments commencing from the specified date. The date has become almost unmeaning when the scheme is being sanctioned. Some instalments holiday is absolutely necessary to give a breathing time to the company. In my opinion, the first instalment payable by the company to the Union Bank of India should commence six months after restarting of all the departments of Unit No. 1 under the scheme, and thereafter every succeeding instalment shall be paid from month to month. The company would be liable to pay interest at the agreed rate but not with quarterly rests. The interest should be simple interest payable from year to year at the agreed rate of interest. The default clause in the scheme by which, in the event of the company committing default in payment of any instalment, the whole of the amount payable to the bank would become due and payable at once, would stand deleted. Whenever the bank wants to sell any property of the company under the rights conferred on the bank in the scheme of compromise and arrangement the same shall not be exercised without prior permission of the court. It is not open to the Union Bank of India to go out of the scheme and proceed to realise the security without obtaining the prior permission of the court.

Similarly, the monthly instalments payable to the Central Board of Trustees under the scheme would commence six month safter the restarting of all the departments of Unit No. I. The company should pay simple interest on the outstanding amount at the rate agreed upon between the company and the Central Board of Trustees of the Provident Fund. The clause in the scheme giving option to the Central Board of Trustees of the Provident Fund to recover the whole of the amount due to it in the event of the company committing default in payment of monthly instalments would stand deleted. The Central Board of Trustees of the Provident Fund would not be entitled to recover damages as conceded in letter No. BPF-1969/ 44878-M Education and Labour Department, Government of Gujarat, dated 18th June, 1969. Whenever the Central Board of Trustees of the Provident Fund want to sell any property of the company under the rights conferred on the board in the scheme of compromise and arrangement the same shall not be exercised without prior permission of the court. It is not open to the board to go out of the scheme and proceed to realise the security without obtaining the prior permission of the court.

The claim of Indequip Ltd., Indian Electro Chemicals Ltd., Dyestuffs Chemicals Private Ltd., M/S. Amarshi Damodar and M/s. Atul Cotton Traders shall be verified by the official liquidator as court officer. After ascertaining the amount, half the verified claim will be converted into share capital of the company. The balance of 50 per cent. of the verified claim payable to Indequip Ltd. and Indian Electro Chemicals Ltd. shall not be payable by the company on their own concession in the event the scheme is finally sanctioned and is worked.

The directors to whom the management of the company would be restored by the provisional liquidator on the scheme being sanctioned are restrained from registering taking any steps hereafter pursuant to the applications already made in respect of charges created in favour of Indequip Ltd., Indian Electro Chemicals Ltd., Dyestuffs and Chemicals Private Ltd., Messrs. Amarshi Damodar and Messrs. Atul Cotton Traders by the decrees of the City Civil Court, Ahmedabad.

In the event of the scheme being finally sanctioned the Union Bank of India should pay to Asia Electric India Private Ltd. from the amount realised from the sale of scrap of Unit No. II of the mills of the company whole or a portion of its claim proportionate to the amount realised from sale of blading system, being part of the power plant of the company, sold by the said creditors to the company and having a charge on it for the unpaid price.

Sanction is hereby accorded to the scheme of compromise and arrangement, copy of which is annexed to this judgment subject to the aforementioned modifications and directions. The court hereby accords sanction to the reduction of share capital as envisaged in the scheme.

All the parties who appeared at the hearing should bear their respective costs, except the official liquidator whose costs should come out of the company. The costs payable to the official liquidator is quantified at Rs. 1,000.

The provisional liquidator is in charge of the company. The directions for return of possession of the company will be given hereafter on judge's summons being taken out by the petitioner or the company. The operation of the order sanctioning the scheme is stayed till 10th January, 1970, as two directors, namely, East India Company, and one other creditor, namely, Pratapsinh Vasantlal, intend to prefer an appeal against this order. The company to pay the expenses incurred by the provisional liquidator on the bills submitted by him.

[1985] 58 COMP. CAS. 563 (SC)

SUPREME COURT OF INDIA

Balkrishan Gupta

v.

Swadeshi Polytex Ltd.

E.S. VENKATARAMIAH AND SABYASACHI MUKHARJI, JJ.

Civil Appeal No. 4803 of 1984

FEBRUARY 12, 1985

K.K. Venugopal, R.N. Karanjawala and Manik Karanjawala for the Appellant.

K. Parasaran, K.S. Cooper, Cyril S. Shroff, S.S. Shroff, Ashok Desai, Anil Diwan, Pinaki Mishra, Parveen Kumar, Dr. Y.S. Chitale, V.D. Mehta, C.A. Babde, S. Swarup, K.J. John and J. Sorabjee for the Respondent.

Anil Diwan, R. Karanjawala, Mrs. Manik Karanjawala, Arun Jetley, Miss Bina Gupta, T.S. Krishnamurthi Iyer and Vineet Kumar for the Intervener.

JUDGMENT

Venkataramiah, J —This appeal by special leave is filed against the order dated August 7, 1984, passed by the High Court of Allahabad in Civil Misc. Application No. 10968 of 1984 in Special Appeal No. 2 of 1982 en its file. The dispute involved in this case relates to the validity of an extraordinary general meeting of the Swadeshi Polytex Ltd. (hereinafter referred to as "the Polytex Company"), a company governed by the Companies Act, 1956 (hereinafter referred to as "the Act"), held pursuant to a notice dated February 11, 1984, issued under s. 169 of the Act by some of its members.

The controlling interest in the Swadeshi Cotton Mills Co. Ltd. (hereinafter referred to as "the Cotton Mills Company") which is also governed by the Act was acquired by Mangturam Jaipuria and his family in 1946. Sitaram Jaipuria is the adopted son of Mangturam Jaipuria. After his adoption, Mangturam Jaipuria got a natural son, Rajaram. In or about the year 1964, Sitaram Jaipuria became the chairman and managing director of the Cotton Mills Company. In 1970, the Jaipuria family decided to promote another company and accordingly the Polytex Company was established. In 1970, Rajaram became the managing director of the Cotton Mills Company and Sitaram continued as its chairman. Sitaram became the chairman and managing director of the newly established Polytex Company in which the Cotton Mills Company had acquired 10 lakhs shares of Rs. 10 each. From about 1975-76 on account of a very serious setback in its financial position, the Cotton Mills Company could not meet the wage bill, the dues of the U.P. Electricity Board and several other monetary claims against it. There were serious labour troubles in its factory and its work virtually became paralysed. The total liability of the Cotton Mills Company was of the order of Rs. 234 crores in the year 1977. On October 27, 1977, the Collector of Kanpur passed an order under s. 182A of the U.P. Land Revenue Act, 1901 (hereinafter referred to as "the Land Revenue Act"), read with s. 5 of the Uttar Pradesh Government Electrical Undertakings (Dues Recovery) Act, 1958, appointing a receiver in respect of the Cotton Mills Company for a period of six months with various powers specified therein and in particular to seize 1 lakh of shares of the Polytex Company of the face value of Rs. 10 lakhs held by the Cotton Mills Company and to pledge them in favour of the State Government of Uttar Pradesh against a loan for the purpose of meeting the dues payable to the employees of the Cotton Mills Company and he made a further order under s. 149 of the Land Revenue Act read with s. 5 of the U.P. Government Electrical Undertakings (Dues Recovery) Act, 1958, attaching the remaining 9 lakhs shares of the Polytex Company held by the Cotton Mills Company and empowering the receiver to seize them. Both the orders appointing the receiver and the order attaching 9 lakhs shares were incorporated in the same document, the relevant part of which read thus:

ORDER

Whereas electricity dues are payable by M/s Swadeshi Cotton Mills Co. Ltd., Kanpur, to the U.P. State Electricity Board and recovery certificates for the amount enumerated below have been received for realisation of the dues above mentioned from the said consumer:

	Rs.
Recovery certificates dated 29.9.76, 31.12.76, 16.12.76, 29.12.76, 16.7.76, 17.9.76 and 3.10.77	1,06,22,423.17
Less : amount paid	19,00,000-00
Balance	87,22,423-17
Add: Collection charges	10,62,242-31
TOTAL RECOVERABLE	97,84,665-48

And whereas, for the expeditious recovery of the dues outstanding as above, without affecting adversely the running of the mills, it is just and proper that a receiver be appointed for the mills at Kanpur, belonging to M/s Swadeshi Cotton Mills Co. Ltd.

Now, therefore, I, K.K. Bakshi, Collector, Kanpur, in exercise of the power under sub-section (1) of section 182A of the U.P. Land Revenue Act of 1901 read with section 5 of the U.P. Government Electrical Undertakings (Dues Recovery) Act, 1958, do hereby appoint Shri L.N. Batra, A.D.M., Kanpur, as receiver of the said mills belonging to M/s Swadeshi Cotton Mills Co. Ltd., for a period of six months with immediate effect and direct that the receiver shall exercise the following powers :

1. The receiver shall exercise supervision over the sales of products of the said mills and the disbursemeut of receipts from day to day.

2. That the receiver shall ensure that the receipts of the said mills are, after the payment of labour dues and other essentials for the running of the mill, appropriated towards recoverable arrears against M/s Swadeshi Cotton Mills Co. Ltd. as land revenue.

3. That the receiver shall, if necessary, for the running of the said mills borrow money from State Government or other financial institutions and make other appropriate arrangements in this behalf for the repayment of the amount and the recovery thereof as arrears of land revenue.

4. That the receiver shall seize the shares held by M/s Swadeshi Cotton Mills Co. Ltd. in M/s Swadeshi Polytex Ltd. of the face value of Rs. 10 lakhs (ten lakhs) and shall be competent to pledge the same by way of security for the borrowings referred to above.

5. That the receiver shall be competent also to make payment to the Punjab National Bank against the guarantee dated 16.12.1976 and relieve the State Government of its liabilities there under correspondingly.

6. That in the event of guarantee furnished by the State Government in favour of the Punjab National Bank dt. 16.12.76 being invoked, the receiver shall be competent to make the payment to the State Government against the liability accruing there from.

7. That the receiver shall have access to all books of account, ledger, cash books, stock books and all other documents kept or maintained by M/s Swadeshi Cotton Mills Co. Ltd. in the course of business.

8. That the reciver shall be competent for the reasons to be recorded also to put a restraint against any transaction being entered into by M/s. Swadeshi Cotton Mills Co. Ltd. involving the business and assets of the mills and which are not in the interest thereof or may be detrimental to the same in his opinion.

9. That the receiver shall have all powers incidental or ancillary for carrying out of the functions and the powers referred to above.

10. That subject to the above and to any directions that I may hereafter issue from time to time, the present management of the said mills shall continue to run the mill and business.

In view of the urgency, the order is being made exparte with the direction, however, that a notice to show cause shall issue to M/s. Swadeshi Cotton Mills Company Ltd. for November 15, 1977.

And further, in exercise of the power under section 149 of the U.P. Land Revenue Act, 1901, read with section 5 of the U.P. Government Electrical Undertakings (Dues Recovery) Act of 1958,1 hereby direct attachment and sale of shares held by M/s. Swadeshi Cotton Mills Co. Ltd. in M/s. Swadeshi Polytex of the face value of Rs. 90 lakhs (ninety lakhs) and hereby empower the receiver to seize the same.

	Sd/- .
Dated: Kanpur	(K. K. Baksi)
October 27, 1977."	Collector, Kanpur

On the same date, i.e., on October 27, 1977, the receiver pledged 1 lakh of shares as per the order of the Collector in favour of the Government of Uttar Pradesh against a loan of Rs. 135 lakhs. The receiver also took possession of 9 lakhs shares as per the order made under s. 149 of the Land Revenue Act. Subsequently, the receiver pledged on November 9, 1977, 1 lakh shares out of the above 9 lakhs shares in favour of the Government of Uttar Pradesh against a loan of Rs. 15 lakhs and on January 4, 1977, 15 lakhs shares against a further loan. Thus, out of the 10 lakhs shares of the Polytex Company of the face value of Rs. 1 crore held by the Cotton Mills Company, 35 lakhs shares stood pledged in favour of the Government of Uttar Pradesh and the remaining 65 lakhs shares of the face value of Rs. 65 lakhs remained with the receiver.

The events which have led to this appeal are, however, these : In the year 1976, the Cotton Mills Company filed a petition under sections 397 and 398 of the Act against the Polytex Company alleging oppression and mismanagement of the Polytex Company by Sitaram Jaipuria and other directors of the Polytex Company in Company Petition No. 20 of 1976 on the file of the Allahabad High Court. That petition was dismissed by the company judge of the High Court on April 19, 1982. Against his decision, an appeal was filed by the Cotton Mills Company in August, 1982, in Special Appeal No. 2 of 1982 before the Division Bench of the High Court. That appeal is still pending. On February 11, 1984, the Cotton Mills Company and four others, namely, Rajaram Jaipuria, Mahabir Prasad Dalmia, Siyaram Sharma and K. B. Agarwal, who together held 10,01,950 shares of the value of Rs. 10 each sent a notice to the Polytex Company which was received by it on February 15, 1984, under section 169 of the Act requiring the board of directors of the Polytex Company to call an extraordinary general meeting of the Polytex Company to consider and, if thought fit, to pass with or without modification the following as ordinary resolutions :

"1. RESOLVED that the appointment of Shri Sitaram Jaipuria as managing director of Swadeshi Polytex Ltd. be and is hereby terminated prior to the expiry of his term, in exercise of the powers conferred by article 110 of the articles of association of the company.

2. Resolved further that Shri Sitaram Jaipuria be and is hereby removed from the office of director and consequently from the office of the managing director of the Swadeshi Polytex Ltd.

3. RESOLVED further that resolution passed at the 13th annual general meeting of Swadeshi Polytex Ltd. in respect of item 7 ' Special Business ' of the notice dated 31st January, 1983, of the said 13th annual general meeting for the remuneration of Shri Sitaram Jaipuria as managing director be and is hereby rescinded.

4. Resolved that Shri Ashok Jaipuria be and is hereby removed from the office of director of Swadeshi Polytex Ltd.

5. Resolved that in the vacancy caused by the removal of Shri Ashok jaipuria, Shri Sitaram Singhania, be and is hereby appointed as a director of Swadeshi Polytex Ltd., and in respect of whose appointment special notices have been received from some members indicating their intention to appoint Shri Sitaram Singhania as a director of the company.

6. Resolved that Shri B.M. Kaul be and is hereby removed from the office of director of Swadeshi Polytex Limited.

7. Resolved that in the vacancy caused by the removal of Shri B.M. Kaul, Dr. Rajaram Jaipuria be and is hereby appointed as a direc tor of Swadeshi Polytex Ltd. and in respect of whose appointment, special notices have been received from some members indicating their intention to appoint Dr. Rajaram Jaipuria as a director of the company.

8. Resolved that Shri P.B. Menon be and is hereby removed from the office of director of Swadeshi Polytex Ltd.

9. Resolved that in the vacancy caused by the removal of Shri P.B. Menon, Shri R.D. Thapar, be and is hereby appointed as a director of Swadeshi Polytex Ltd. and in respect of whose appointment, special notices have been received from some members indicating their intention to appoint Shri R.D. Thapar as a director of the company."

The requisitionists of the meeting also asked the Polytex Company to treat the said notice as a special notice under s. 284(2) and (5) read with s. 190 of the Act for appointment of Sitaram Singhania, Rajaram Jaipuria and R.D. Thapar in place of Ashok Jaipuria, B.M. Kaul (who was also the chairman of the Cotton Mills Company) and P.B. Menon respectively as directors of the Polytex Company. They enclosed an explanatory statement as required by s. 173 of the Act to the notice containing reasons for moving the aforesaid resolutions. On receipt of the notice, an emergent meeting of the directors of the Polytex Company was held on February 23, 1984, to consider the above-said notice issued under s. 169 of the Act. The following is the material part of the minutes of the said meeting:

"Requisition notice

The Board was informed that a notice had been received at the registered office of the company on 15th February, 1984, from Swadeshi Cotton Mills Co. Ltd. (SCM) and four other shareholders requistioning an extraordinary general meeting of the company under section 169 of the Companies Act, 1956.

The requisition notice received from SCM was read before the board. The board considered the motives behind the requisition and took serious note of the false and baseless allegations made in the explanatory note enclosed to the notice of requisition. The secretary pointed out a few technical defects in the requisition notice. The draft notice and the explanatory statement were placed before the meeting. The same was perused and discussed and the following resolutions were passed :

Resolved that an extraordinary general meeting of the company, pursuant to the requisition received by the company on 15th February, 1984, under section 169 of the Companies Act, 1956, from Swadeshi Cotton Mills Co. Ltd. and others be held at the registered office of the company on Wednesday, the 28th March, 1984, at 10-30 a.m.

Resolved further that the secretary be and is hereby authorised to issue notice for convening the aforesaid meeting as per draft placed before the board and initialled by the chairman for the purposes of identification and to take such other steps as may be required in this regard.

The board was of the view that the financial institutions should be informed of this development and the directors who wish to make their representation to the shareholders may be requested to do so. The secretary was directed to take necessary steps in this regard."

The board of directors also prepared and circulated an explanatory statement pursuant to s. 173 of the Act along with the notice issued to the shareholders calling the extraordinary general meeting to be held on March 28, 1984. The requisitionists of the meeting filed an application before the Division Bench in Special Appeal No. 2 of 1982 for appointing a chairman of the meeting. S. Jagannathan, who was a member of the board of directors as the nominee of I.F.C.I, was appointed as the chairman of the meeting by the Division Bench on March 23, 1984. The meeting was, however, adjourned as a shareholder had obtained on order of temporary injunction restraining the holding of the meeting in a suit filed by him at the Court of the Munsif, Alipore (West Bengal). When the requisitionists applied to the High Court of Allahabad to fix a fresh date for the meeting, the High Court declined to do so by its order dated May 22, 1984, because the temporary injunction order had been issued by a court not subordinate to it. It appears that another shareholder applied for injunction in a suit filed in the Civil Judge's Court at Gwalior and a third shareholder moved the City Civil Court, Madras, for a similar relief. Then the requisitionists filed two special leave petitions before this court against the order of the Allahabad High Court dated May 22, 1984. On June 20, 1984, this court passed the following order on the said petitions which were numbered as Civil Appeals Nos. 2597 and 2598 of 1984:

"Special leave granted.

The High Court of Allahabad shall make a fresh order directing the holding of the meeting of the company and that meeting shall be held in accordance with the order of the High Court notwithstanding any order of injunction, etc., issued by any other court or authority in India or to be issued hereafter. If any person has any grievance about the holding of the meeting, he shall approach the High Court of Allahabad for appropriate directions. If the requisitionists or the company wish to hold the meeting early, they may approach the vacation judge of the High Court of Allahabad who has all the powers of the company judge to make fresh orders. The appeals are disposed of accordingly."

Again on July 4, 1984, a further order was passed by this court as follows:

"Mr. Sorabjee and Mr. Mridul state that the extraordinary general meeting may be called on any day to be fixed by the High Court in the second week of August, 1984, They also state that the venue of the meeting shall be determined by the chairman, Shri Jagannathan, appointed by the High Court. No further orders are necessary on prayers (b) and (c) in the application dated June 25, 1984, made before the Allahabad High Court by the petitioner."

Accordingly the meeting was fixed to be held on August 14, 1984. Since there was a motion for the adjournment of the meeting, this court was again approached by the parties by an application for a further direction which was disposed of on September 4, 1984. In the meanwhile appellant No. 1, Balkrishan Gupta, had filed an application before the High Court of Allahabad in Special Appeal No. 2 of 1982 questioning the right of the requisitionists to issue notice under s. 169 of the Act to call the extraordinary general meeting. His contention was that since a receiver had been appointed by the Collector in respect of the shares held by the Cotton Mills Company and they had also been attached, the shares held by the Cotton Mills Company could not be taken into consideration for determining the required qualification to issue the notice under s. 169 of the Act requisitioning the extraordinary general meeting and that if those shares were omitted from consideration, then the shares held by the other requisitionists would not be sufficient to issue the said notice. That application was dismissed by the High Court by its order dated August 7, 1984. This appeal by special leave is filed against the said order of the High Court. In this appeal, this court passed the following order on September 14, 1984:

"All the learned counsel for the parties in this petition agree that the meeting which is now adjourned to September 24, 1984, should be held on that day and the agenda of the meeting should be discussed and voted upon. We make an order accordingly. The result of the voting shall be reported to this court by the chairman within one week after it is ascertained. The resolutions passed at the meeting shall not come into effect until further orders by this court. The matter may be listed in the third week of Ocotber, 1984."

After the report submitted by the chairman of the meeting was received by this court, this court passed a further order on October 12, 1984, which reads as follows :

"The report of the chairman of the extraordinary general meeting which has been submitted to this court in a sealed cover is opened and perused by the court. The report states that all the resolutions other than the resolution for adjournment have been lost. The photostat copies of the report along with the enclosures may be made available to the parties at their expense. List the matter on 29-10-1984 before this Bench."

After the above order was passed, the Industrial Development Bank of India and the Industrial Finance Corporation of India who were aggrieved by the result of the counting of votes given on the taking of poll at the meeting filed applications before this court questioning the correctness of the report of the chairman as regards the result of the meeting. They contended that the chairman had wrongly rejected the votes cast on their behalf and if these votes had been taken into consideration, the resolutions would have been duly passed. Some shareholders who were opposed to the removal of the sitting directors also filed an application for being impleaded. All these applications were allowed on November 19, 1984, and all parties agreed that the validity of the meeting and of its result reported to the court should be decided by this court. During the hearing, a writ petition filed, in the High Court of Bombay was also transferred to this court for being heard along with these cases. At the conclusion of the hearing of the above cases, the parties filed a compromise petition requesting the court to make an order in terms thereof. On the basis of the said compromise, the court passed an order on February 1,1985, the material part of which reads thus :

"1. The board of directors of Swadeshi Polytex Ltd. (hereinafter referred to as 'SPL') shall be reconstituted pending the holding of the next annual general meeting of SPL as under :

(a) Four nominees of the financial institutions (including one to be selected and communicated by IDBI/IFCI to SPL) including the representative of the U. P. State Industrial Development Corporation.

(b) Four nominees of Shri Sitaram Jaipuria (hereinafter referred to as ' SRJ) including SRJ.

(c) Four nominees of Dr. Rajaram Jaipuria (hereinafter referred to as 'RRJ') including RRJ.

All nominations under sub-clauses (b) and (c) above shall be made by February 9, 1985. Nominations under sub-clause (a) (except the nominee of the U. P. State Industrial Corporation) shall be made within ten days of the date of this order. The reconstituted board shall start functioning from February 11, 1985. The secretary of SPL is directed to convene the reconstituted board meeting within 15 days of the order.

2. (a) SRJ and RRJ shall designate one nominee each out of their respective nominee-directors as executive directors. The said executive directors shall jointly carry on the management of SPL and will have all the powers of the managing director and control of finance, If any difference of opinion arises, it shall be referred to the board of directors.

(b) All committees of the board shall stand dissolved.

3. SRJ shall continue as the managing director of the company and he voluntarily undertakes not to exercise any powers or functions of the managing director till his re-election at the next annual general meeting of SPL.

4. SRI will continue to be the chairman of the company and as such will preside over the board meetings of SPL. He voluntarily undertakes not to have any second or casting vote.

5. All minutes of the board meetings shall be prepared by a nominee of the financial institutions and shall be signed by the chairman.

6. The next annual general meeting of SPL shall be called and held on May 15, 1985. The chairman of the said annual general meeting shall be appointed by this court.'

7. All the members of the reconstituted board appointed pursuant to clause 1 above (excluding nominees mentioned in clause 1(a) (including non-rotational directors, i.e., SRJ and/or Shri F. R. Beshania, shall resign and a new board shall be elected at the said annual general meeting. All shareholders of SPL (including SRJ and RRJ) shall be entitled to propose names of any persons for appointment as directors of SPL at the said annual general meeting. Members of the reconstituted board may, if they so desire, seek re-election at the said annual general meeting.

8. All pending matters before this court including the Transfer Case No. 1 of 1985 and all Civil Misc. Petitions in Civil Appeal No. 4803 of 1984 save and except Civil Appeal No. 4803 of 1984 (Balkrishan Gupta v. Swadeshi Polytex Ltd.) shall stand withdrawn and all questions raised in all such withdrawn proceedings are expressly left open. All allegations against the financial institutions, the chairman of the IDBI and the Government in Transfer Case No. 1 of 1985 and Civil Misc. Petitions Nos. 39900 of 1984 and 340 of 1985 shall stand withdrawn.

9. Votes cast by the financial institutions at the next annual gene. ralmeeting of SPL to be held on May 1 5, 1985, shall not be questioned by the parties hereto on any ground.

10. The Civil Appeal No. 4803 of 1984 (Balkyishan Gupta v. Swadeshi Polytex Ltd.) shall be disposed of on merits.

11. Notice of board meeting to all members of the reconstituted board shall be sent by registered post acknowledgment due.

12. It shall be open to the board of directors if it so chooses to re view any delegation of powers.

13. There shall be no disciplinary action by way of victimisation of any employee.

14. SRJ shall obtain the resignation of the present members of the board of directors (excluding the nominees of financial institutions).

15. Liberty is reserved to the parties to apply to this court.

The undertakings that have to be filed in accordance 'with the above order shall be filed in this court within one week from today. The next annual generasl meeting which is ordered to be held on May 15, 1985, shall be held notwithstanding any order, direction or injunction of any other court in India. The parties are at liberty to apply to this court for nominating a chairman for the next annual general meeting.

Judgment in Civil Appeal No. 4803 of 1984 is reserved.

All the other cases referred to above stand disposed of in terms of this order."

The parties, however, requested the. court to decide the question relating to the right of the Cotton Mills Company to join as a requisitionist of a meeting under s. 169 of the Act or to vote at a meeting of the company since it was likely that one or the other member might raise it as an issue at the next meeting. We shall, therefore, proceed to decide the said question by this judgment.

The principal ground urged on behalf of the appellants is that the extraordinary general meeting had not been validly called since the Cotton Mills Company had ceased to enjoy the privileges of a member of the Polytex Company by reason of the appointment of a receiver by the Collector of Kanpur in respect of the ten lakhs shares in the Polytex Company held by the Cotton Mills Company, the attachment of the nine lakhs shares out of the said 10 lakhs shares and also the pledge of 3,50,000 shares out of the said 10 lakhs shares with the Government of Uttar Pradesh as security for the loans advanced by it. The total paid-up equity share capital of the Polytex Company is Rs. 3,90,00,000 (39,00,000 shares of Rs. 10 each) and it is not disputed that if the 10 lakhs shares held by the Cotton Mills Company are omitted from consideration, the remaining requisitionists would not have sufficient voting strength to issue a notice under s. 169 of the Act. The appellants contend that the Cotton Mills Company could not, therefore, join the other requisitionists in issuing the notice under s. 169 of the Act calling upon the Polytex Company to call the extraordinary general meeting and without the support of the shares held by the Cotton Mills Company, the remaining requisitionists would not have been eligible to requisition the meeting. The material part of s. 169 of the Act reads:

"169. Calling of extraordinary general meeting on requisition.—(1) The board of directors of a company shall, on the requisition of such number of members of the company as is specified in sub-s. (4), forthwith proceed duly to call an extraordinary general meeting of the company.

(2) The requisition shall set out the matters for the consideration of which the meeting is to be called, shall be signed by the requisitionists, and shall be deposited at the registered office of the company.

(3) The requisition may consist of several documents in like form, each signed by one or more requisitionists.

(4) The number of members entitled to requisition a meeting in regard to any matter shall be:

(a) in the case of a company having a share capital, such number of them as hold at the date of the deposit of the requisition, not less than one-tenth of such of the paid-up capital of the company as at that date carries the right of voting in regard to that matter;............"

We have already referred to the order of the Collector appointing the receiver in respect of the shares in question, attaching them and ordering that 3,50,000 shares be pledged in favour of the Government of Uttar Pradesh.

Section 150 of the Act requires every company to keep a register of members containing the" name, address and the occupation, if any, of each member and other particulars mentioned therein. Section 153 of the Act provides that no notice of any trust, express, implied or constructive, shall be entered on the register of members. Section 153B of the Act, however, provides that notwithstanding anything contained in s. 153, where any shares in a company are held in trust by any person, he (the trustee) shall within such time and in such form as may be prescribed make a declaration to the public trustee appointed under s. 153A of the Act in accordance with and subject to the rest of the provisions of s. 153B of the Act.

It is clear from the relevant provisions of the Act which are referred to hereafter that a member can participate and exercise his vote at a meeting of a company in accordance with the Act and the articles of association of the company. Section 41 of the Act defines the expression "member" of a company. The subscribers to the memorandum of association of a company shall be deemed to have agreed to become members of the company and on its registration shall be entered as members in its register of members. A subscriber to the memorandum is liable as the holder of shares which he has undertaken to subscribe for. Any other person who agrees to become a member of a company and whose name is entered in its register of members shall be a member of the company. In his case, the two conditions, namely, that there is an agreement to become a member and that his name is entered in the register of members of the company are cumulative. Both the conditions have to be satisfied to enable him to exercise the rights of a member. Subject to s. 42 of the Act, a company or a body corporate may also become a member. When once a person becomes a member, he is entitled to exercise all the rights of a member until he ceases to be a member in accordance with the provisions of the Act. The voting rights of a member of a company are governed by s. 87 of the Act. Section 87 of the Act says that subject to the provisions of s. 89 and sub-s. (2) of s. 92 of the Act, every member of a company limited by shares and holding any equity share capital therein shall have a right to vote, in respect of such capital, on every resolution placed before the company and his voting right on a poll shall be in proportion to his share of the paid-up equity capital of the company. Regulations 8 and 86(a) of the articles of association of the Polytex Company read :

"8. Save as herein otherwise provided, the company shall be entitled to treat the registered holder of any share as the absolute owner thereof and accordingly shall not, except as ordered by a court of competent jurisdiction or as by law required, be bound to recognise any trust, benami or equitable or other claim to or interest in any such share or any fractional part of such share on the part of any other person whether or not it shall have express or other notice thereof.

86(a). On a show of hands every holder of equity shares entitled to vote and present in person or by proxy shall have one vote and upon a poll, every holder of equity shares entitled to vote and present in person or by proxy shall have one vote for every equity share held by him."

A person ceases to be a member by transferring his share to another person, by transmission of his share by operation of law, by forfeiture of share, by death, or by any other reason known to law. In the case before us, therefore, three points arise for consideration at this stage.

They are :

(i) Whether by reason of the appointment of the receiver under the Land Revenue Act in respect of the shares of the Polytex Company held by the Cotton Mills Company, the Cotton Mills Company had ceased to have the rights of a member under section 169 of the Act ?

(ii) Whether by the attachment of the shares under section 149 of the Land Revenue Act, the Cotton Mills Company suffered any diminution or curtailment in its rights as a shareholder in respect of the shares so attached ?

(iii) Whether by the pledge of certain shares, the Cotton Mills Company suffered any such diminution or curtailment ?

In the Act, the expressions "a member", "a shareholder" or "holder of a share" are used as synonyms to indicate the person who is recognised by a company as its owner for its purposes. What does ownership of a share connote? "Ownership in its most comprehensive signification", says Salmond, "denotes the relation between a person and any right that is vested in him. That which a man owns in this sense is a right." The right of ownership comprises benefits like claims, liberties powers, immunities and privileges and burdens like duties, liabilities, disabilities, etc. Whatever advantages a man may have as a result of the ownership of a right may be curtailed by the disadvantages in the form of burdens attached to it. As observed by Dias, an owner may be divested of his claims, etc., arising from the right owned to such an extent that he may be left with no immediate practical benefit. He remains the owner none the less because his interest will outlast that of other persons in the thing owned. The owner possesses that right which ultimately enables him to enjoy all rights in the thing owned by attracting towards himself those rights in the thing owned which for the time being belong to others, by getting rid of the corresponding burdens. An owner of a land may get rid of the interest of a mortgagee in it by redeeming the mortgage, may get physical possession of land by terminating a lease and may get rid of an attachment by discharging the debt for which it is attached. A receiver appointed by a court or authority in respect of a property holds it for the benefit of the true owner subject to the orders that may be made by such court or authority. The different kinds of rights of ownership flowing from the ownership of a right depend upon the nature of the right owned. A person who is a shareholder of a company has many rights under the Act. Some of them, with which we are concerned in this appeal principally, are : (i) the right to vote at all meetings (s. 87), (ii) the right to requisition an extraordinary general meeting of the company or to be a joint requisitionist (s. 169), (iii) the right to receive notice of a general meeting (s. 172), (iv) the right to appoint proxy and inspect proxy registers (s. 176), (v) in the case of a body corporate which is a member, the right to appoint a representative to attend a general meeting on its behalf (s. 187), and (vi) the right to require the company to circulate his resolutions (s. 188). The question for consideration is : when does a shareholder cease to be entitled to exercise any of these rights ?

Section 182A of the Land Revenue Act which provides for the appointment of a receiver in respect of the assets of a defaulter who is liable to pay an arrear of revenue or any other sum recoverable as an arrear of revenue reads thus :

"182A. Appointment of receiver.—(1) Notwithstanding anything in this Act, when an arrear of revenue or any other sum recoverable as an arrear of revenue is due, the Collector may, in addition to or instead of any of the processes hereinbefore specified, by order,—

(a) appoint, for such period as he may deem fit, a receiver of any movable or immovable property of the defaulter ;

(b) remove any person from the possession or custody of the property ;

(c) commit the same to the possession, custody or management of the receiver ;

(d) confer upon the receiver all such powers, as to bringing and defending suits and for the realisation, management, protection, preservation and improvement of the property, the collection of the rents and pro fits thereof, the application and disposal of such rents and profits, and the execution of documents, as the defaulter himself has or such of those powers as the Collector thinks fit.

(2) Nothing in this section shall authorise the Collector to remove from the possession or custody of property any person whom the defaulter has not a present right to remove.

(3) The Collector may from time to time extend the duration of appointment of the receiver.

(3A) No order under sub-section (1) or sub-section (3) shall be made except after giving notice to the defaulter to show cause, and after considering any representations that may be received by the Collector in response to such notice :

Provided that an interim order under sub-section (1) or sub-section (3) may be made at any time before or after the issue of such notice :

Provided further that where an interim order is made before the issue of such notice, the order shall stand vacated if no notice is issued within two weeks from the date of the interim order.

(4) The provisions of rules 2 to 4 of Order XL, contained in the First Schedule to the Code of Civil Procedure, 1908, shall apply in relation to a receiver appointed under this section as they apply in relation to a receiver appointed under the Code with the substitution of references to the Collector for references to the court."

Section 149 of the Land Revenue Act, which provides for the attachment and sale of movable property belonging to a defaulter, reads thus :

"149. Attachment and sale of movable property.—The Collector may, whether the defaulter has been arrested or not, attach and sell his movable property.

Every attachment and sale ordered under this section shall be made, according to the law in force for the time being for the attachment and sale of movable property under the decree of a civil court. In addition to the particulars mentioned in clauses (a) to (o) of the proviso to section 60 of the Code of Civil Procedure, 1908 (Act V of 1908), articles set aside exclusively for the use of religious endowments shall be exempted from attachment and sale under this section. The costs of the attachment and sale shall be added to the arrear of revenue, and shall be recoverable by the same procedure."

We shall first consider the effect of appointment of a receiver in respect of the shares in question. A perusal of the provisions of s. 182A of the Land Revenue Act shows that there is no provision in it, which states that on the appointment of a person as a receiver, the property in respect of which he is so appointed vests in him, similar to the provision in s. 17 of the Presidency Towns Insolvency Act, 1909, where on the making of an order of adjudication, the property of the insolvent wherever situate would vest in the official assignee, or in s. 28(2) of the Provincial Insolvency Act, 1920, which states that on the making of an order of adjudication, the whole of the property of the insolvent would vest in the court or in the official receiver. Sub-section (4) of s. 182A of the Land Revenue Act provides that rules 2 to 4 of Order XL of the Code of Civil Procedure, 1908, shall apply in relation to a receiver appointed under that section. A receiver appointed under O. XL of the CPC only holds the property committed to his control under the order of the court but the property does not vest in him. The privileges of a member can be exercised by only that person whose name is entered in the register of members. A receiver whose name is not entered in the register of members cannot exercise any of those rights unless in a proceeding to which the company concerned is a party and an order is made therein. In R. Mathalone v. Bombay Life Assurance Co. Ltd. [1954] 24 Comp Cas 2 ; AIR 1953 SC 385 ; [1954] SCR 117, it has been laid down clearly that a receiver appointed by a court in respect of certain shares which had not been duly entered in the register of members of the company concerned as belonging to him could not acquire certain newly issued shares which could be obtained by the members of the company. This court observed at page 21 of 24 Comp Cas thus :

"Mr. Pathak argued that the plaintiff was entitled to reliefs (a) and (b) both in his suit as well as in the receiver's suit and that the receiver's suit was wrongly dismissed by the High Court. We are unable to agree. In our opinion, the High Court rightly held that the receiver appointed in the suit of Sir Padampat could not acquire the newly issued shares in his name. That privilege was conferred by section 105C only on a person whose name was on the register of members. The receiver's name admittedly was not in the register and the company was not bound to entertain that application. Mr. Pathak argued that that may be so but the receiver was not making an application in his individual right but he had been armed by the court with power to apply in the right of the defendant, Reddy. The fact, however, is that the receiver made the application in his own name. Even if Mr. Pathak's contention is right, the company was no party to the suit filed by Sir Padampat against Reddy and that being so, no order could be issued to the company in that suit to recognize the receiver as a shareholder in place of Reddy."

Even where the holder of a share whose name is entered in the register of members hands over his shares with blank transfer forms duly signed, the transferee would not be able to claim the rights of a member as against the company concerned until his name is entered in the register of members. This court in Howrah Trading Co. Ltd. v. CIT [1959] 29 Comp Cas 282 ; 36 ITR 215 ; AIR 1959 SC 775 ; [1959] Supp. 2 SCR 448, has observed at pp. 286 and 287 of 29 Comp Cas thus:

"The position of a shareholder who gets dividend when his name stands in the register of members of the company causes no difficulty whatever. But transfers of shares are common, and they take place either by a fully executed document such as was contemplated by regulation 18 of Table A of the Indian Companies Act, 1913, or by what are known as ' blank transfers '. In such blank transfers, the name of the transferor is entered, and the transfer deed signed by the transferor is handed over with the share scrip to the transferee, who, if he so chooses, completes the transfar by entering his name and then applying to the company to register his name in place of the previous holder of the share. The company recognises no person except one whose name is on the. register of members, upon whom alone calls for unpaid capital can be made and to whom only the dividend declared by the company is legally payable. Of course, between the transferor and the transferee, certain equities arise even on the execution and handing over of ' a blank transfer', and among these equities is the right of the transferee to claim the dividend declared and paid to the transferor who is treated as a trustee on behalf of the transferee. These equities, however, do not touch the company, and no claim by the transferee whose name is not in the register of members can be made against the company, if the transferor retains the money in his own hands and fails to pay it to him.

A glance at the scheme of the Indian Companies Act, 1913, shows that the words 'member', 'shareholder', and 'holder of a share' have been used interchangeably in that Act. Indeed, the opinion of most of the writers on the subject is also the same. Buckley on the Companies Acts, 12th edition, page 803, has pointed out that the right of a transferee is only to call upon the company to register his name and no more. No rights arise till such registration takes place."

In this case, this court followed the dictum of Chitty J. in Wala Wynaad Indian Gold Mining Co., In re [1882] 21 Ch 849 (Ch D) which emphasised that the entry of the name of person in the register of members was an essential condition for exercising voting rights at the meeting of the company concerned.

In Buckley on the Companies Acts (14th edn.), vol. I, p. 972, it is stated thus :

"Company cannot enquire into beneficial ownership.—As between the shareholder and the company, the person entitled to exercise the right of voting is the person legally entitled to the shares, the member whose name is on the register."

In Kurapati Venkata Mallayya v. Thondepu Ramaswami and Co. [1963] Supp. 2 SCR 995 ; AIR 1964 SC 818, this court had occasion to consider the validity of a suit instituted by a receiver to collect debts due to a party to a suit in his own name. The court upheld the right of the receiver to maintain the suit observing that a receiver invested with full powers to administer the property which is custodia legis or who is expressly authorised by the court to institute a suit for collection of debts was entitled to institute a suit in his own name provided he did so in his capacity as a receiver. But in the course of the said decision, this court approved the decision of the Calcutta High Court in Jagat Tarini Dasi v. Naba Copal Chaki [1907] ILR 34 Cal 305 in which it had been stated : "On the whole, we are disposed to take the view that, although a receiver is not the assignee or beneficial owner of the property entrusted to his care, it is an incomplete and inaccurate statement of his relation to the property to say that he is merely its custodian" (Underlining by us). Thus, whatever may be the other powers of a receiver dealing with the property which is in custodia legis while in his custody, he is not to be construed as either an assignee or beneficial owner of such property.

In Wiser. Lansdell [1921] 1 Ch 420 (Ch D), it was held that in the case of a bankrupt whose name was still on the register of members of a company, as between himself and the company, the bankrupt, so long as his name remained on the register, was entitled to vote in respect of the shares, though as between himself and the mortgagees, he could vote only as they dictated. But the right to vote was held to be unimpaired as long as his name appeared on the register.

In a later case, Morgan v. Gray [1953] 1 Ch 83 (Ch D), after referring to the decision in Wise v. Lansdell [1921] 1 Ch 420 (Ch D), Danckwerts J. observed (at p. 87 of [1953] 1 Ch) :

"It seems to me that, unless there is some provision in the company's articles or in the Companies Act which empowers me to say that the bankrupt is no longer a member of the company, and is, therefore, unable to vote, expressly, I must come to the conclusion that the bankrupt still remains a member as long as he is on the register, notwithstanding that by taking appropriate steps under the appropriate provisions the trustee in bankruptcy may be able to secure registration of himself as the proprietor of the shares. Unless and until that is done, and as long as the bankrupt remains on the register of the company, he remains a member in respect of those shares and is entitled, as it seems to me, to exercise the votes which are attributable to that status, notwithstanding that he has no longer any beneficial interest in the shares and that the company is entitled to pay any dividends to his trustee in bankruptcy."

The following statement in Kerr on Receivers (13th Edn.) at page 310 : "the power of the company and its directors to deal with the property comprised in the appointment (both property subject to a floating charge and property subject to a fixed charge), except subject to the charge, are paralysed", which was relied on by the appellants, is not of much use to them. It only means that the authority competent to appoint a receiver may give directions regarding the property. It does not imply that the right of the company to exercise the right to vote on the basis of the shares of another company held by it at the meeting of such other company becomes automatically suspended.

Under s. 51 of the Code of Civil Procedure, 1908, a receiver may be appointed by a civil court on the application of a decree-holder in execution of a decree for purposes of realising the decree-debt. This is only a mode of equitable relief granted ordinarily when other modes of realisation of the decretal amount are impracticable. A receiver appointed under that section will be able to realise the amounts due from a garnishee and his powers are akin to the powers of a receiver appointed under 0. 40, r. 1 of the CPC, 1908. But he would not have any beneficial interest in the assets of the judgment-debtor. He collects the debts not as his own but as an officer of the court.

We do not also find any substance in the contention of the appellant based on s. 137 of the Act. Section 137 of the Act provides that if any person obtains an order for the appointment of a receiver of, or of a person to manage, the property of a company, or if any person appoints such receiver under any powers contained in any instrument, he shall, within thirty days from the date of the passing of the order or of the making of the appointment under the said powers, give notice of the fact to the Registrar; and the Registrar shall, on payment of the prescribed fee, enter the fact in the register of charges maintained under s. 130 of the Act. It is not clear in this case whether any entry had been made in the register of charges of the order of appointment of receiver in this case. Even granting that such an entry had been made, it would not have the effect of taking away the right of the Cotton Mills Company to exercise the right to vote in respect of the shares in question. We do not also find any substance in the argument based on ss. 153B, 187B and 187C of the Act. Section 153 of the Act states that no notice of any trust, express, implied or constructive, shall be entered in the register of members or of debenture holders. Section 153B of the Act requires that notwithstanding anything contained in s. 153, where any shares in, or debentures of, a company are held in trust by any person, the trustee shall make a declaration to the public trustee. Section 187B of the Act provides that save as otherwise provided in s. 153B but notwithstanding anything contained in any other provisions of the Act or any other law or any contract, memorandum or articles, where any shares in a company are held in trust by a person as trustee, the rights and powers (including the right to vote by proxy) exer-cisable at any meeting of the company or at any meeting of any class of members of the company by the trustee as a member of the company cease to be exercisable by the trustee as such member and become exercisable by the public trustee. Section 187C of the Act makes it incumbent upon a person whose name is entered in the register of members of a company but who does not hold the beneficial interest in the share in question in such form as may be prescribed make a declaration to the company specifying the name and other particulars of the person who holds the beneficial interest in such share. The Companies (Declaration of Beneficial Interest in Shares) Rules, 1975, are made in this connection. It is obvious from the foregoing that none of the provisions referred to above has any bearing on the question before us.

Mere appointment of a receiver in respect of certain shares of a company without more cannot, therefore, deprive the holder of the.shares whose name is entered in the register of members of the company the right to vote at the meetings of the company or to issue a notice under s. 169 of the Act.

The consequence of attachment of certain shares of a company held by a shareholder for purposes of sale in a proceeding under s. 149 of the Land Revenue Act is more or less the same. The effect of an order of attachment is what s. 149 of the Land Revenue Act itself says. Such attachment is made according to the law in force for the time being for the attachment and sale of movable property under the decree of a civil court. Section 60 of the CPC, 1908, says that except those items of property mentioned in its proviso, lands, houses, or other buildings, goods, money, banknotes, cheques, bills of exchange, hundis, promissory notes, Government securities, bonds or other securities of money, debts, shares in a corporation and all other saleable property, movable or immovable, belonging to a judgment-debtor, or over which, or the profits of which, he has a disposing power which he may exercise for his own benefit, whether the same be held in the name of the judgment-debtor, or by another person in trust for him or on his behalf, are liable for attachment and sale in execution of a decree against him. Section 64 of the CPC, 1908, states that where an attachment of a property is made, any private transfer or delivery of the property attached or of any interest therein and any payment to the judgment-debtor of any debt, dividend or other monies contrary to such attachment, shall be void as against all claims enforceable under the attachment. What is forbidden under section 64 of the CPC is a private transfer by the judgment-debtor of the property attached contrary to the attachment, that is, contrary to the claims of the decree holder under the decree for realisation of which the attachment is effected. A private transfer under s. 64 of the CPC is not absolutely void, that is, void as against all the world but void only as against the claims enforceable under the attachment. Until the property is actually sold, the judgment-debtor retains title in the property attached. Under r. 76 of 0. 21 of the CPC, 1908, the shares in a corporation which are attached may be sold through a broker. In the alternative, such shares may be sold in public auction under r. 77 thereof. On such sale, either under rule 76 or under r. 77, the purchaser acquires title. Until such sale is effected, all other rights of the judgment-debtor remain unaffected even if the shares may have been seized by on officer of the court under r. 43 of O. 21 of the CPC, 1908, for the purpose of effecting the attachment, or through a receiver or through an order in terms of r. 46 of O. 21 of the CPC which may have been served on the judgment-debtor or on the company concerned.

On behalf of the appellants, relying upon the decision in Hawks v. Me Arthur [1951] 1 All ER 22, it is contended that the order of the Collector attaching the shares was in the nature of a charging order which deprived the Cotton Mills Company of its rights in them. Having carefully gone through the said decision, we find that it has not much relevance to the case. In that case, the chairman and the manager of a company had purchased certain shares of the company held by one of its members in two separate lots after paying consideration there for contrary to art. 13 of the company's articles of association which granted a right of pre-emption to all the other members in respect of the shares in question. 'Immediately after the said purchases were made, another member of the company obtained a money decree against the transferor of the shares and also a charging order over the shares standing in the name of the transferor but which had been sold earlier either to the chairman or the manager. He claimed that since the transfer of the shares was contrary to art. 1 3 of the company's articles of association, the transfer was void and, hence, he was entitled to enforce the charging order against those shares for realising his decretal amount. The court negatived his claim holding that notwithstanding the complete failure to comply with the company's articles in regard to the procedure to be followed before the shares could be transferred, the transferees having paid to the transferor the full consideration for the shares had obtained equitable rights therein and as their rights accrued earlier than the equitable right of the plaintiff under the charging order, their rights must prevail over his claim. It was argued before us that the order of the Collector being an order in the nature of a charging order, the receiver had obtained an equitable right in the shares in question and there being no other legal or equitable right which would prevail over it, the Cotton Mills Company had lost its right to the shares. The statement of facts of the above decision itself shows that it has no bearing on the case before us. It is to be noted that a charging order under the English Law is not the same as an attachment of property or appointment of a receiver under the Land Revenue Act. We may state here that charging orders under the English Law are made under O. 50 of the English Supreme Court Practice under which the English court may for the purpose of enforcing a judgment or order of that court under which a debtor is required to pay um of money to a creditor, make an order imposing on any such property of the debtor as may be specifed in the order, a charge for securing the payment of any money flue or to become due under the judgment or order. Such an order is referred to as the "charging order". A charging order on the property or assets of the debtor is one of the modes of enforcement of a judgment or order for the payment of money to the creditor. It is, however, not a direct mode of enforcement in the sense that the creditor can immediately roceed to recover the fruits of his judgment, but it is rather an indirect mode of enforcement in the sense that it provides the creditor with security, in whole or in part, over the property of the debtor. It makes the creditor a secured creditor who having obtained his charging order must proceed, as may be necessary according to the nature of the property charged, to enforce his charge in order to obtain the actual proceeds of his charge to satisfy his judgment, in whole or in part. Subject to the other provisions of law, a charge imposed by a charging order will have effect and will be enforceable in the same court and in the same manner as an equitable mortgage created by the debtor by writing under his hand. A short passage in Mula's Code of Civil Procedure (14th Edn), Vol. II at page 151s instructive and reads thus :

"There is no provision in the Code for charging orders, but on the Original Side of the High Courts, which have inherited the older jurisdiction of the Court of Chancery, it is the practice in cases where it is considered undesirable to grant immediate execution to make a charging order in the form made in the case of Kewy v. Attil [18] 34 Ch D 345. When the assets require nursing, the advantage of a charging order is that it enables the court on the one hand to gain time and on the other hand to protect the decree-holder. It also avoids the confusion that might ensue if the court were to allow a direct attachment while it is administering the assets of the partnership. The effect of a charging order is to constitute the decree-holder a secured creditor although he undertakes to deal with the charge subject to the further orders of the court."

An order of attachment cannot, therefore, have the effect of depriving the holder of the shares of his title to the shares. We are of the view that the attachment of the shares in the Polytex Company held by the Cotton Mills Company had not deprived the Cotton Mills Company of its right to vote at the meeting or to issue the notice under s. 16of the Act.

The fact that 3,50,000 shares have been pledged in favour of the Government of Uttar Pradesh also would not make any difference. Sections 172 to 178A of the Indian Contract Act, 1872, deal with the contract of pledge. A pawn is not exactly a mortgage. As observed by this court in Lallan Prasad v. Rahmat All, AIR 1967 SC 1322; [1967] 2 SCR 233, the two ingredients of a pawn are (at p. 1325 of AIR 1967 SC):

"(1) that it is essential to the contract of pawn that the property pledged should be actually or constructively delivered to the pawnee, and

(2) a pawnee has only a special property in the pledge but the general property therein remains in the pawner and wholly reverts to him on discharge of the debt. A pawn, therefore, is a security, where, by contract, a deposit of goods is made as security for a debt. The right to property vests in the pledge only so far as is necessary to secure the debt... The pawner, however, has a right to redeem the property pledged until the sale."

In Bank of Bihar v. State of Bihar [1971] 41 Comp Cas 591 ; AIR 1971 SC 1210; [1971] Supp 2 SCR 299, also this court has reiterated the above legal position and held that the pawnee had a special property which was not of ordinary nature on the goods pledged and so long as his claim was not satisfied, no other creditor of the pawner had any right to take away the goods or its price. Beyond this, no other right was recognised in a pawnee in the above decision. Under s. 176 of the Indian Contract Act, 1872, if the pawner makes default in payment of the debt, or performance, at the stipulated time, of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawner upon the debt or promise, and retain the goods pledged as a collateral security, or he may sell the thing pledged, on giving the pawner reasonable notice of the sale. In the case of a pledge, however, the legal title to the goods pledged would not vest in the pawnee. The pawnee has only a special property. A pawnee has no right of foreclosure since he never had the absolute ownership at law and his equitable title cannot exceed what is specifically granted by law. In this sense, a pledge differs from a mortgage. In view of the foregoing, the pawnee in the instant case, i.e., the Government of Uttar Pradesh, could not be treated as the holder of the shares pledged in its favour. The Cotton Mills Company continued to be the member of the Polytex Company in respect of the said shares and could exercise its rights under s. 169 of the Act.

It may be stated here that the Government of Uttar Pradesh and the Collector who are the parties to this appeal have not questioned the correctness of the judgment of the High Court.

One other subsidiary contention urged on behalf of the appellants relates to the effect of an order made by the Central Government on April 13, 1978, under s. 18AA(1)(a) of the Industries (Development and Regulation) Act, 1951, taking over the management of Swadeshi Cotton Mills along with five other industrial units belonging to the Cotton Mills Company which was the subject-matter of dispute in Swadeshi Cotton Mills v. Union of India [1981] 51 Comp Cas 210 (SC); [1981] 2 SCR 533, and the order of extension passed by the Central Government on November 26, 1983, which is the subject-matter of dispute in a case now pending before this court. It is urged on behalf of the appellants that on the passing of the above-said orders, the Cotton Mills Company lost its right to exercise its voting rights in respect of the shares in question. There is no substance in this contention. What was taken over under the above-said orders was the management of the six industrial units referred to therein and not all the rights of the Cotton Mills Company. The shares belong to the company and the orders referred to above cannot have any effect on them. The Department of Company Affairs, Government of India, rightly expressed its view in the letter written by C. Khushaldas, Director in the Department of Company Affairs, on April 9, 1979, to B.M. Kaul, Chairman of the Cotton Mills Company, that the voting rights in respect of these shares continued to vest with the Cotton Mills Company and the manner in which those voting rights were to be exercised was to be determined by the board of directors of the Cotton Mills Company. Hence, the passing of the orders under s. 18AA(1)(a) of the Industries (Development and Regulation) Act, 1951, has no effect on the voting rights of the Cotton Mills Company.

It is also significant that the directors of the Polytex Company who knew that a receiver had been appointed in respect of the shares in question, that they had been attached by the Collector, that a part of them had also been pledged in favour of the Government of Uttar Pradesh and that orders had been passed under s. 18AA(1)(a) of the Industries (Development and Regulation) Act, 1951, taking over six industrial units of the Cotton Mills Company, did not question the validity of the notice. The Polytex Company had in this case rightly treated the registered holder, i.e., the Cotton Mills Company, as the owner of the shares in question and to call the meeting in accordance with the notice issued under s. 169 of the Act. The appellants cannot, therefore, be allowed to raise any dispute about the validity of the meeting on any of the grounds referred to above.

In the result, the appeal fails and it is dismissed with costs. The costs of all the parties to the above appeal and other connected cases shall, however, be borne by the Polytex Company.

Subject to the above order, the order passed by the court on February 1, 1985, shall remain in force.

[1995] 84 COMP. CAS. 559 (MAD.)

HIGH COURT OF MADRAS

Manoj Kumar Sonthalia

v.

Nariman Point Building Service and Trading Pvt. Ltd.

AR. LAKSHMANAN, J.

ORIGINAL APPLICATION NOS. 760 TO 764 AND 768 OF 1992 AND

APPLICATION NOS. 4718 AND 4719 OF 1992 IN C.S. NO. 1246 OF 1992

APRIL 20, 1993

K. Parasaran and Arvind P. Datar for the Applicant.

R. Krishnamurthi , P. Chidambaram, G.E. Vahan Vati, Arun Jaithey, Darius Khambatta, Navroz Seervai for the Respondent.

JUDGMENT

AR. Lakshmanan, J.—The above applications were filed by the plaintiff in the suit for various reliefs pending disposal of the suit.

The short facts are as follows : The plaintiff/applicant filed C.S. No. 1246 of 1992 against the first defendant/first respondent company (in short "NPBS"), four other newspaper companies and six other persons. The suit is primarily concerned with the validity of a board meeting of the second defendant/Indian Express, Bombay Limited, Bombay, held on January 23, 1991, and certain resolutions for appointing additional directors. The plaintiff/applicant also prays for declaration and permanent injunction in respect of various acts committed by the sixth defendant/sixth respondent along with other directors, particularly Nusli Wadia (seventh defendant) and Venu Srinivasan (eighth defendant). Many interlocutory applications have been filed by the plaintiff/applicant in this suit.

The plaintiff/applicant had also filed C.S. No. 1247 of 1992 against NPBS and nine others. The defendants include Nusli Wadia, Venu Srinivasan, Mrs. Saroj Goenka and her three daughters. This suit challenges the transfer of shares in the aforesaid board meeting held on January 5, 1991, and also seeks for a declaration that 24.32 per cent. shares have been held in trust for the benefit of the plaintiff's brother.

Serious allegations have been made regarding the holding of the board meeting on January 5, 1991, and the extraordinary general meeting on January 23, 1991. According to the plaintiff, no notice has been given in respect of these meetings and the same were conducted clandestinely. The resolutions passed therein were filed before the Registrar of Companies through the office of Sundaram Clayton Limited, of which the eighth defendant is the managing director. According to the plaintiff, this was done with the intention to suppress from the plaintiff and his mother the fact of the illegal share transfer. The reasons as to why the meetings and the resolutions passed are invalid have been set out in detail in the plaint. Therefore, I am not repeating the same here. Similarly, in the other suit (C.S. No. 1247 of 1992), it is stated that the shares were neither intended to be nor were transferred as there was no consideration for the same. According to the plaintiff, the shares were retained only in trust. The reasons as to why the share transfers are null and void have been set out in the plaint in that suit, with which we are not presently concerned.

The prayers in the present applications are as follows :

O.A. No. 760 of 1992 : To restrain by an order of temporary injunction respondents Nos. 7, 8 and 9/defendants Nos. 7, 8 and 9 from exercising any powers as directors of the first respondent/first defendant company.

O.A. No. 761 of 1992 : To restrain by an order of temporary injunction respondents Nos. 7, 8 and 9/defendants Nos. 7, 8 and 9 from exercising any powers of the second respondent/second defendant company pending disposal of the suit.

O.A. No. 762 of 1992 : To pass an order of temporary injunction restraining respondents Nos. 10, 11 and 12/defendants Nos. 10, 11 and 12 from acting or exercising any of the powers as directors and/or alternative directors of respondents Nos. 1 to 5/defendants Nos. 1 to 5 companies pending disposal of the suit.

O.A. No. 763 of 1992 : To pass an order of temporary injunction restraining the sixth respondent/sixth defendant from exercising powers as managing editor, chairman and executive director in so far as the third and fourth respondents/third and fourth defendants companies are concerned pending disposal of the suit.

O.A. No. 764 of 1992 : To pass an order of temporary injunction restraining the operation of the resolution passed at the board meetings of the second and third respondents/second and third defendants dated June 24, 1992, September 5, 1992, and September 13, 1992, reducing or curtailing the powers of the plaintiff/applicant as joint managing director and further directing continuance of status quo pending disposal of the suit.

O.A. No. 768 of 1992 : To pass an order of temporary injunction restraining respondents Nos. 6 to 12/defendants Nos. 6 to 12 from interfering in any manner in the plaintiff/applicant's powers as joint managing director of the third respondent/third defendant company pending disposal of the suit.

Application No. 4718 of 1992 : To direct the restoration of all powers vested in the applicant/plaintiff in respondents Nos. 1 to 5/defendants Nos. 1 to 5 consequent to the resolutions passed in the board meeting of the first respondent/first defendant held on September 26, 1990, pending disposal of the suit.

Application No. 4719 of 1992 : To direct the applicant/plaintiff, Mrs. Saroj Goenka and the sixth respondent/sixth defendant to be appointed as joint representatives of the respondent/defendant companies under section 187 of the Companies Act.

A common affidavit has been filed in all the above applications. According to the applicant/plaintiff, in furtherance of conspiracy, the alleged board meeting was held on January 5, 1991, wherein far reaching resolutions were passed, viz.

(a) Appointing defendants Nos. 7 to 9 as directors and thereby making the plaintiff and his mother/the fourteenth defendant a helpless minority.

(b) 6,240 equity shares and 4,000 preference shares belonging to the plaintiff and 3,040 equity shares standing in the joint names of the plaintiff and the sixth defendant were transferred to the name of RNG. Despite the serious nature of the resolutions being passed, neither the plaintiff nor his mother was given any notice of the board meeting and were informed about the same only in March, 1991.

(c) It is further contended as under : No notice in writing was given of the board meetings, which is a mandatory requirement.

(d) The appointment of three additional directors was sought to be confirmed at the extraordinary general body meeting to be held on January 23, 1991. No notice of this meeting was given to the plaintiff and his mother and the minutes of the meeting have not been shown to the plaintiff till date.

(e) The ninth defendant was shown as having been appointed as director. He has been included only because of his close association with RNG and to give a facade of legality/responsibility over the illegal appointment.

(f) Form 32 has to be filed with the Registrar of Companies in respect of appointment of new directors. But, in respect of appointment of three additional directors, this form was filed on February 13, 1991, by the secretarial staff of Sundaram Clayton Limited, of which the eighth defendant is the managing director.

(g) Defendants Nos. 7 to 9 were made as directors of the second defendant company by an alleged board meeting held on January 23, 1991, where RNG was to have been the chairman. No notice of this meeting was given to the plaintiff or to Mrs. Goenka. An extraordinary general meeting was allegedly held on February 21, 1991, of which again no notice was given.

(h) The appointment of defendants Nos. 6 to 8 as directors is completely illegal. The alleged board meeting itself is a nullity and all resolutions purported to have been passed there are void and without effect.

(i) The administrative powers of the managing director and joint managing director of respondents Nos. 3 and 4 have been reduced so as to deprive them of substantial powers of management and to render their offices a nullity with intent to humiliate the plaintiff and Mrs. Saroj Goenka.

(j) Defendants Nos. 6 to 8 have managed to gain control of respondents Nos. 1 and 2/defendants Nos. 1 and 2 companies. In furtherance of their conspiracy, they have appointed R.A. Shah/the twelfth defendant as a director of the second defendant at the board meeting held on June 24, 1992.

(k) The manner in which the first defendant owns or controls the other defendant companies has been set out in the plaint.

(l) At the board meeting held on September 26, 1990, RNG formally laid down the plan for succession and subsequently the articles of the first defendant were also amended to implement the decisions taken at the board meeting.

(m) After the death of RNG, and particularly after the enormity of the fraud was revealed on March 17, 1992, the sixth defendant has adopted a hostile attitude against the plaintiff and Mrs. Saroj Goenka. He has also embarked upon a course of action to systematically humiliate the plaintiff by removing all the administrative powers vested in him as joint managing director of the southern newspapers. The actions taken by the sixth defendant have been fully set out in paragraph 21(a) to (d) of the affidavit.

(n) The plaintiff became aware of the appointment of defendants Nos. 7 to 9 as additional directors in March, 1991. At that time, no action was taken keeping in mind the critical state of RNG's health.

(o) The enormity of the fraud played by defendants Nos. 6 to 8 depriving the plaintiff of his, shares became clear only after he received the minutes of the board meeting of the first defendant company held on January 5, 1991. Thereafter, steps were taken by several well wishers to avoid any legal proceedings being taken in the matter so as to maintain the peace and harmony of the family, Several discussions were also held with senior members of the Times of India group to settle the disputes amicably. All these attempts were rendered futile because of the recalcitrant attitude of the sixth defendant.

(p) By the first week of September, 1992, it was clear that there was no chance of settlement and thereafter the plaintiff was constrained to file the above suit for the necessary reliefs.

In the above circumstances, the plaintiff has filed the present applications for the reliefs mentioned therein.

A common counter-affidavit has been filed by Vivek Goenka/sixth defendant/sixth respondent denying all the allegations contained in the affidavit filed in support of these applications.

Mr. K. Parasaran, learned senior counsel for the plaintiff/applicant, reiterated the contentions raised by the plaintiff in the affidavit filed in support of these applications.

I shall now take up O.A. No. 760 of 1992 which is to injunct defendants Nos. 7 to 9 from exercising powers as directors of the first defendant/first respondent company and deal with the factual aspects of the matter. In answer to the said prayer, Mr. P. Chidambaram, learned senior counsel appearing for the sixth defendant/sixth respondent submits as under : Defendants Nos. 7 to 9/respondents Nos. 7 to 9 were inducted at the board meeting held on January 5, 1991. The plaintiff denies knowledge about the said meeting. This is falsified by the following facts :

(a) The plaintiff himself admits that at the board meeting held on March 16, 1991, of IENB, he was informed of induction of defendants Nos. 7 to 9 on the board of the first defendant company.

(b) In the board meeting held on April 7, 1991, the plaintiff was present. The plaintiff took the chair. The seventh defendant was present and leave of absence to defendants Nos. 8 and 9 was granted.

(c) In the board meeting held on June 26, 1991, the plaintiff was present. The eighth defendant was in the chair. The seventh defendant was present.

(d) In the board meeting held on September 24, 1991, the plaintiff was again present. The seventh defendant was in the chair. The eighth defendant was present.

(e) In the board meeting held on February 4, 1992, the plaintiff was present. The seventh defendant was in the chair and the eighth defendant was present.

(f) In the board meeting held on June 24, 1992, the plaintiff was present. The seventh defendant was in the chair and the eighth defendant was present.

(g) In the board meeting held on September 5, 1992, the plaintiff was present. The seventh defendant was in the chair. The plaintiff objected to the seventh defendant taking the chair but not to his being present at the meeting as director. The eighth defendant was also present and no objection was taken by the plaintiff. Until the suit was filed, the plaintiff never challenged the induction or attendance of defendants Nos. 7 and 8 or leave of absence granted to the ninth defendant at the board meetings, in any letter or proceeding.

In answer to the submissions made by Mr. P. Chidambaram, Mr. K. Parasaran, learned senior counsel, submits that the plaintiff was given only the minutes of the board meeting of IENB/second defendant and that the minutes of the meeting dated January 5, 1991, of the first defendant company were deliberately suppressed and not furnished till March 17, 1992, which, according to the learned senior counsel, concealed the fraud being played upon the plaintiff. Further, the fact of defendants Nos. 7 to 9 being elected as directors at the extraordinary general body meeting of the first defendant company was completely concealed. According to the plaintiff, no notice of this meeting was given to the plaintiff and his mother and no container theory was put forth for this meeting. In so far as it relates to the board meeting held on April 7, 1991, it is contended that the minutes of the previous board meeting held on January 23, 1991, were not read and confirmed and the election of defendants Nos. 7 to 9 through the extraordinary general body meeting of the first defendant company held on January 23, 1991, was also deliberately suppressed. It is stated that the plaintiff came to know of the transfer of shares only after the death of RNG on October 5, 1991.

O.A. No. 761 of 1992 was filed to injunct defendants Nos. 7 to 9/ respondents Nos. 7 to 9 from exercising powers as directors of the second defendant/second respondent company. It is seen from the documents filed that defendants Nos. 7 to 9 were inducted as directors in the board meeting held on January 23, 1991. The plaintiff denies knowledge of the said meeting, which, according to Mr. P. Chidambaram, learned senior counsel for the sixth defendant, is falsified by the following facts :

(a) In the board meeting held on March 16, 1991, the plaintiff was present. Mrs. Saroj Goenka was in the chair and defendants Nos. 7 to 9 were present. This is mentioned in paragraph 24 of the plaint.

(b) At the board meeting held on June 26, 1991, the plaintiff was present. The seventh defendant took the chair and the eighth defendant was present.

(c) At the board meeting held on September 24, 1991, the plaintiff was present. Mrs. Saroj Goenka was in the chair. Defendants Nos. 7 and 8 were present. It is at this meeting, the sixth defendant, Vivek Goenka was appointed as managing editor of all the publications of the second defendant company. It may even be recalled at this stage that a similar resolution was passed on the same date in respect of the publications of the third defendant company as well.

(d) At the board meeting held on September 5, 1992, the plaintiff was present. The seventh defendant was in the chair. The eighth defendant was present. At this meeting, the sixth defendant, Vivek Goenka, was redesignated as managing director of the second defendant company.

Mr. K. Parasaran, learned senior counsel for the plaintiff, in reply submits that the appointment of defendants Nos. 7 to 9 was deliberately suppressed and that the sixth defendant became a permanent representative of the second defendant company by fabricating the minutes of the first defendant company dated August 31, 1990. My attention was drawn to pages 29 and 34 of the plaintiff's documents. Thus, it is contended that the seventh defendant's self-appointment as sole representative of the first defendant company and the consequent extraordinary general body meeting held on February 21, 1991, were deliberately concealed as part of a fraudulent conspiracy. Though the participation of the plaintiff in the board meetings was admitted, it was argued, that he participated in the said meetings ignorant of the fraud being played upon him. It is further contended that after RNG's death, at the subsequent board meetings, the plaintiff objected to the presence of the seventh defendant or taking the chair. In fact, he represented to Nusli Wadia/seventh defendant about the practice of fabricating the minutes. But, no reply was received from him to the plaintiff's letter dated September 11, 1992.

It is seen from the proceedings extracted above of the various board meetings that the plaintiff has attended several meetings and that he can claim no equity in his favour. In fact, the plaintiff has nothing to do with the second defendant company and RNG himself has proposed the appointment of additional directors. It is also very relevant to notice that no application for injunction in respect of the third defendant company was filed. Defendants Nos. 7 to 9 are also the directors of the third defendant company and the plaintiff does not ask for a similar prayer for the third defendant company.

O.A. No. 762 of 1992 has been filed by the plaintiff to injunct defendants Nos. 10 to 12/respondents Nos. 10 to 12 from exercising powers as directors/alternate directors in defendants Nos. 1 to 5/respondents Nos. 1 to 5 companies. According to Mr. K. Parasaran, learned senior counsel for the plaintiff, the prayer has been framed comprehensively as A defendants Nos. 10 to 12 are directors in some companies and alternate directors in other companies and the appointment of these persons was strongly objected to but the final minutes do not record the dissent. It is further argued that no injunction against defendants Nos. 7 to 9 in respect of the third defendant company was asked for because the plaintiff was led to believe that RNG was present at the meeting held on June 24,1991, and had signed a circular resolution dated June 26, 1991. Though he was present, he was not made the chairman. The plaintiff was not present and believed that RNG had signed the minutes. The medical records produced for June 24, 1991, would show that RNG was examined on that date by Dr. Doongajee. On March 11, 1991, this doctor states, RNG was able to recognise the relatives but unable to even remember anything. When the newspaper was read to him, he could not retain anything and the newspaper was read again. The medical evidence recorded on February 23, 1993, would reveal that the appointment of defendants Nos. 7 and 9 was not in order since RNG could not have been present or have participated in the meeting. Thus, it is submitted that these facts were deliberately suppressed from the plaintiff and that the fraud was revealed only later.

I am of the view that the prayer asked for in O.A. No. 762 of 1992 is misconceived, as rightly contended by Mr. P. Chidambaram, learned senior counsel for the sixth defendant, in so far as defendants Nos. 4 and 5 companies are concerned. Defendants Nos. 10 to 12 are not directors of these two companies. The most significant aspect of this application read with other applications is that there is no prayer seeking an injunction against defendants Nos. 7 to 9 in respect of the third defendant company, which is the most crucial company so far as the plaintiff is concerned. In so far as the first defendant company is concerned, defendants Nos. 10 and 12 were inducted as directors on June 24, 1992, and the plaintiff was present at the said meeting. According to the minutes placed before this court, there was no dissent. According to the version of Mrs. Saroj Goenka of the minutes, she and the plaintiff dissented. It is also not disputed that the eleventh defendant is not a director of the first defendant company and hence, I am of the view, the prayer in this behalf is misconceived as rightly urged by Mr. P. Chidambaram.

In so far as the second defendant company is concerned, defendants Nos. 10 and 12 were inducted as directors on June 24, 1992, in the very presence of the plaintiff. It is also not disputed that the eleventh defendant is not a director of the second defendant company and hence, this application in this behalf is misconceived. In so far as the third defendant company is concerned, defendants Nos. 10 and 11 were inducted as directors on June 24, 1992, in the presence of the plaintiff. The twelfth defendant is not a director of the third defendant company and hence, the prayer in this behalf is also misconceived. I am of the view that no injunction as prayed for is justified since the plaintiff having been a party to the appointment of these people as directors, it is not open to him to challenge these appointments. The plaintiff is also picking and choosing the appointment of directors as mentioned above.

O.A. No. 763 of 1992 has been filed by the plaintiff to injunct the sixth defendant, Vivek Goenka, from exercising powers as managing editor and chairman and executive director in so far as defendants Nos. 3 and 4 companies are concerned. According to Mr. K. Parasaran, learned senior counsel for the plaintiff, this prayer was sought for because the sixth defendant increasingly interfered in the day-to-day affairs of the third defendant company and has appointed one P.M. Rajagopalan as the chief executive with more powers than the managing director/joint managing director. On January 28, 1993, he has also appointed one Narasimhan as the president and virtually all the departments were directed to report to him directly or through P. M. Rajagopalan. Almost all the powers of the plaintiff in the third defendant company have been eliminated, vide resolutions dated June 24, 1992, September 5, 1992, and September 13, 1992. These have been challenged in Application No. 5998 of 1992, wherein status quo of the plaintiff as on June 24, 1992, is sought to be restored.

In answer to the submissions made by Mr. K. Parasaran, learned senior counsel for the plaintiff, Mr. P. Chidambaram, learned senior counsel for the sixth defendant, submits that so far as the fourth defendant company is concerned, the prayer is misconceived. As rightly contended by him, the sixth defendant is not the chairman and executive director of the fourth defendant company. The only directors of the fourth defendant company are Mrs. Saroj Goenka, the plaintiff and the sixth defendant. The resolution was passed by that board appointing the sixth defendant as managing editor, with the approval of both Mrs. Saroj Goenka and the plaintiff.

In so far as the third defendant company is concerned, the sixth defendant was appointed as managing editor at the board meeting held on September 24, 1991, and it was also reiterated at the board meeting held on June 24, 1992. So far as the chairman and executive director arc concerned, the sixth defendant was appointed as the executive director of the third defendant company at the board meeting held on November 1, 1989, and has been functioning as such for the last 3½ years. He was appointed as chairman at the board meeting held on September 5, 1992. Above all, the plaintiff was present and the seventh defendant was in the chair. No grounds have been urged to grant injunction against the sixth defendant for functioning as managing editor and/or chairman and executive director of the third defendant company.

At this stage, it is pertinent to notice the order passed by me on April 13, 1993, dismissing Application No. 5998 of 1992 (since reported in Vivek Goenka v. Manoj Sonthalia [1993] 2 MLJ 1, 6 ; [1995] 83 Comp Cas 897) filed by the plaintiff. That application was filed to ensure that the plaintiff's powers as joint managing director of the third defendant company as on June 24, 1992, should be maintained pending disposal of the suit. The sixth defendant was the only respondent in that application. It is useful to extract paragraph 27 of my order in that application (at page 908 of 83 Comp Cas) :

"It is the duty of this court to recognise the corporate democracy of a company in managing its affairs. It is not for this court to restrict the powers of the board of directors. The board of directors in various resolutions have appointed the sixth defendant as executive director, managing editor and chairman. It will not be open to this court to interdict the functions of the board managed company. As rightly contended by Mr. P. Chidambaram, learned senior advocate, it will not be open to this court to interfere with the day-to-day functions, management and administration of a company unless it is established that the decisions taken by the board are ultra vires the Act or the articles of association of the company. At this interlocutory stage this court is concerned only with the prima facie case and balance of convenience as disclosed by the documents produced by both parties. It is for the plaintiff to let in oral evidence at the time of trial and establish his case."

As pointed out by Mr. P. Chidambaram, learned senior counsel for the sixth defendant, the plaintiff had taken part in the board meetings held on June 24, 1992, and September 5, 1992. The protest was only on September 5, 1992. Resolutions were passed by majority. In so far as the meeting held on June 24, 1992, is concerned, no objection was raised for the appointment of the sixth defendant as managing editor and hence, I am of the view, the. plaintiff is not entitled to any equitable or discretionary relief as prayed for in the above application. Therefore, I hold that this application is misconceived and the same is liable to be rejected.

O.A. No. 764 of 1992 has also to be rejected for the same reasoning given in my order dated April 13, 1993, in Applications Nos. 841, 5129 and 5998 of 1992.

O.A. No. 768 of 1992 has been filed by the plaintiff to injunct defendants Nos. 6 to 12/respondents Nos. 6 to 12 from interfering with the plaintiff's powers as joint managing director of the third respondent/third defendant company. As observed by me earlier, this application also has to abide by the decision rendered by me in Applications Nos. 841, 5129 and 5998 of 1992 dated April 13, 1993 (since reported in Vivek Goenka v. Manoj Sonthalia [1993] 2 MLJ 1 ; [1995] 83 Gomp Cas 897).

It is contended by Mr. K. Parasaran, learned senior counsel for the plaintiff, that the plaintiff became a director of the third defendant company in 1980 itself. The board meeting dated June 24, 1991, is seriously disputed in the light of the medical evidence, which came to be disclosed on February 23, 1993. Again, it is repeated that the appointment of defendants Nos. 10 to 12 on June 24, 1992, has been disputed. The minutes have been fabricated and in any event, defendants Nos. 10 to 12 were appointed by virtue of the illegal majority obtained by inducting defendants Nos. 7 to 9. The appointments of defendants Nos. 6 to 12 is itself disputed. The appointment of defendants Nos. 7 to 9 in the first defendant and the second defendant companies at the respective extraordinary general body meetings held on January 23, 1991, and February 13, 1992, is clearly illegal and liable to be set aside and no container theory in respect of these meetings has also been put forth. Therefore, it is argued, that injunction should be granted restraining defendants Nos. 6 to 12 from interfering with the plaintiff's powers as joint managing director of the third defendant company.

According to Mr. P. Chidambaram, learned senior counsel for the sixth defendant, the sixth defendant became a director of the third defendant company in the year 1985. Defendants Nos. 7 to 9 were inducted as directors of the third defendant company by a circular resolution dated June 24, 1991, which has been signed by RNG, sixth defendant, Mrs. Saroj Goenka and the plaintiff. This, in my view, is the principal reason why the plaintiff is not able to challenge and, therefore, has not challenged the appointment of defendants Nos. 7 to 9 as directors of the third defendant company. So far as defendants Nos. 10 to 12 are concerned, I have already dealt with the same while dealing with O.A. No. 762 of 1992 and, hence, I am not repeating the same here.

As rightly submitted by Mr. P. Chidambaram, learned senior counsel for the sixth defendant, defendants Nos. 6 to 12 were validly appointed as directors of the third defendant company and, hence, they are entitled to function as such and take part in the management of the said company. Section 291 of the Companies Act deals with the general powers of the board and the restrictions thereon. The gist of the section is that except where express provision is made that the powers of a company in respect of any particular matter are to be exercised by the company in general meetings, in all other cases, the board of directors are entitled to exercise all its powers. When the validity of the appointment is not in doubt, no injunction, in my view, can be granted as prayed for. Hence, this application is also liable to be dismissed.

Application No. 4718 of 1992 has been filed by the plaintiff for a direction for restoration of all powers vested in the plaintiff in defendants Nos. 1 to 5 companies consequent to the resolution passed at the board meeting of the first defendant company held on September 26, 1990. Mr. K. Parasaran, learned senior counsel for the plaintiff, submits that the minutes constitute the succession plan of RNG and that the said plan was implemented by amending the articles, interlocking the rights and interests of the plaintiff and the sixth defendant, and making RNG supreme till his life time. In any event, it is the plaintiff's case, that the handing over of the shares to Nusli Wadia was to be done by both the grandsons. However, only the plaintiff's shares were illegally transferred to RNG's name by virtue of the conspiracy between defendants Nos. 6 and 7. Even the shares held in the joint names were not transferred where Vivek Khaitan's name was shown as the first shareholder. He submits that the minutes are not a pious wish and hence, as recorded in the minutes, defendants Nos. 1 to 5 companies have to be run by the plaintiff and the sixth defendant as a team and any resolution in violation of this specific directive would be contrary to the RNG's succession plan.

Mr. P. Chidambaram, learned senior counsel for the sixth defendant, in reply to the above argument contends that the whole prayer is misconceived and the minutes referred to are the minutes of the board meeting of the first defendant company. The said minutes, according to Mr. P. Chidambaram, contain only the pious wish of late RNG. They do not constitute the resolution and the same is also not enforceable in a court of law. In any event, the subsequent change in the shareholding pattern of the first defendant company would prevail over a pious wish expressed by the late RNG. Notwithstanding the pious wish, on the same day, viz., on September 26, 1990, after the meeting, RNG in the presence of the seventh defendant, asked the plaintiff to transfer back the shares to him, which is admitted by the plaintiff by his letter dated November 12, 1990, to the seventh defendant. In the same letter, the plaintiff also admits that it seemed he had lost the confidence of RNG and hoped that the act of his sending the shares together with the share transfer deeds as desired by his grandfather "will restore the faith and the trust that I seem to have lost".

According to Mr. P. Chidambaram, all these are irrelevant in so far as defendants Nos. 2 to 5 companies are concerned. A pious wish expressed at the board meeting of the third defendant company is not relevant to the management of defendants Nos. 2 to 5 companies. Above all, it is submitted, that no powers were vested in the plaintiff in defendants Nos. 1 to 5 companies consequent on the resolution dated September 26, 1990. Hence, in my view, the question of restoration of such powers does not arise.

Application No. 4719 of 1992 is filed by the plaintiff for a direction that the plaintiff, Mrs. Saroj Goenka and the sixth defendant shall be appointed as joint representatives of all the respondent companies under section 187 of the Companies Act. Mr. K. Parasaran, learned senior counsel for the plaintiff, elaborating the said prayer, submits that the sixth defendant, Vivek Goenka, appoints himself as the sole representative of defendants Nos. 1 and 2 companies by fabricating the minutes and by getting appointed as the sole representative of the second defendant company, the sixth defendant uses the illegally obtained majority to appoint himself as the sole representative in other respondent companies as well, and if his appointment in the second defendant company is set aside, then, his appointment in several companies also will have to be set aside.

I am of the view, that the prayer in this behalf is totally misconceived. Under section 187 of the Companies Act, a body corporate may appoint only one representative. There is no question of appointing joint representatives. In so far as the first defendant company is concerned, as rightly contended by Mr. P. Chidambaram, section 187 of the Companies' Act is not applicable because it is composed of shareholders who are individuals, who will exercise their power to elect/appoint directors who will manage and represent the company. In so far as the second defendant company is concerned, it is the first defendant company which has to appoint its representative, which means that the board of directors of the first defendant company will appoint a representative to represent the first defendant company in the meetings of the second defendant company. Similarly, in so far as the third defendant company is concerned, it is the board of directors of the second defendant company who will appoint a representative to represent the second defendant company in the meetings of the third defendant company.

In so far as the fourth defendant company is concerned, it was originally a wholly owned subsidiary of the fifth defendant company and as long as it was so, it was the board of directors of the fifth defendant company who would appoint a representative. It is also stated that between June, 1992, and January, 1993, the fourth defendant company was sold to the first defendant company and has become a subsidiary of the first defendant company. Hence, it is the board of the first defendant company which will appoint a representative to represent it at the meetings of the fourth defendant company. So far as the fifth defendant company is concerned, it is a wholly owned subsidiary of the third defendant company and, hence, it is the board of directors of the third defendant company which will appoint a representative to represent it at the meetings of the fifth defendant company. Thus, I am of the view, that the prayer in this application is also wholly misconceived and cannot be granted for the aforesaid reasons.

Mr. P. Chidambaram, learned senior counsel for the sixth defendant submits, that the plaintiff's objective in injuncting defendants Nos. 7 to 9 is because he wants to control the board of directors although he is a minority shareholder. In reply, it was argued on behalf of the plaintiff that the plaintiff's objective is not to control the company but to ensure that the persons who have been elected in a fraudulent and illegal manner are removed. Although the plaintiff is a minority shareholder, he is entitled to participate in the management of the company along with the sixth defendant, which is made clear by the board resolution and the subsequent amendment of articles on September 26 and 27, 1990, respectively, which states that the plaintiff and the sixth defendant have to work as a team and that they were his successors to run the newspapers. The exclusion of the plaintiff from the management of the companies would be a ground to wind up the company under the just and equitable clause. For this proposition, the learned senior counsel for the plaintiff has cited the decisions in Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 (HL) and Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwala, AIR 1976 SC 565 ; [1976] 46 Comp Cas 91.

It is contended by Mr. K. Parasaran, learned senior counsel for the plaintiff, that once a prima facie case of fraud is established, the interim relief asked for should follow, otherwise, the perpetrators of fraud will reap the benefits of fraud during the interregnum. It is further urged that the Companies Act does not require that the board of directors must reflect the shareholding pattern. The proper legal position is that the shareholders who are in a majority can elect directors of their choice. The Act does not authorise the majority to eliminate the minority by wrongful means. In a family owned company, a large shareholder cannot be removed from management on the plea of corporate democracy.

Mr. P. Chidambaram, learned senior counsel for the sixth defendant, submits that all the defendant companies have the power to appoint additional directors and, therefore, defendants Nos. 7 to 9 have been validly appointed. In reply to this argument, Mr. K. Parasaran, learned senior counsel for the plaintiff, submits that there is no dispute about the power to appoint additional directors, but the same has been done by fraudulent exercise of that power. The real case, according to the learned senior counsel for the plaintiff, is regarding the conspiracy and fraud perpetrated by the sixth defendant with the active connivance of defendants Nos. 7 and 8 against the plaintiff. Mr. K. Parasaran further submits that the conspiracy has started not on January 5, 1991, but much earlier and as soon as RNG settled the succession issue on September 26, 1990. The same was to convert a unitary ownership of the sixth defendant and the plaintiff into the sole ownership of the sixth defendant and also to convert the team of the plaintiff and the sixth defendant into an exclusive performance of the sixth defendant.

Regarding the appointment of additional directors, it is stated by Mr. K. Parasaran, learned senior counsel for the plaintiff, that the plaintiff never knew that first the appointments were part of a larger design and even during the period from January 5, 1991, to October 5, 1991, he was always given the impression that the three persons were appointed as additional directors in defendants Nos. 1 and 2 companies at two board meetings. But, the fact that defendants Nos. 7 to 9 were elected as directors of the first defendant company at an extraordinary general body meeting of the first defendant company on January 23, 1991, was concealed from the plaintiff. The illegal transfer of shares was also deliberately suppressed from the plaintiff till the 13th day after RNG's death. The minutes of January 5, 1991, meeting were deliberately suppressed from the plaintiff. If the board meetings of the period January 5, 1991, to October 5, 1991, are examined, it will be seen that all the resolutions related to management of various companies and there is no interference in the powers of the plaintiff. Thus, all the meetings were conducted in such a manner so as to conceal the election of defendants Nos. 7 to 9 as directors and the illegal transfer of shares. The plaintiff had no knowledge of the fraud of confiscation of his shares by the purported transfer of shares. As the plaintiff had no knowledge of the fraud or conspiracy during the period, no question of estoppel or acquiescence on the part of the plaintiff can arise at all. No one can be held to acquiesce in a fraud against him. Learned senior counsel for the plaintiff has also made a reference to Halsbury's Laws of England, 4th edition, volume 16, paragraphs 1472 and 1473, in this context. Thus, it was argued that there can be no waiver/estoppel/acquiescence if a person had no knowledge of the fraud being committed or of his rights being violated.

I am unable to accept the argument of learned senior counsel for the plaintiff. The suppression of the plaintiff's own participation in approving the appointment of defendants Nos. 7 to 9 in defendants Nos. 3 and 5 companies on June 24, 1991, and June 26, 1991, respectively, assumes significance not only from the point of view of the maintainability of the plaintiff's challenge to the resolution of the board of directors of the third defendant company but also from the point of view of the credibility of the plaintiff and the positive attempt on the part of the plaintiff to mislead this court in material respects. The circular resolutions for the appointment of defendants Nos. 7 to 9 on the board of defendants Nos. 3 and 5 companies clearly establish the following :

(a) RNG had initiated the move to appoint these three persons as additional directors.

(b) He was present at the meeting of the third defendant company held on June 24, 1991.

(c) It was considered by all the directors including the plaintiff that it was desirable to appoint defendants Nos. 7 to 9 on the board of directors on account of their eminence, in that, such appointment was to be made in the various companies in the group for uniformity of policy and better co-ordination of the operations of the companies. In fact, defendants Nos. 7 and 8 are described in the circular resolution as well-known industrialists.

(d) The suppression of the plaintiff's own participation in the said resolution becomes even more significant if reference is made to the averments made in the plaint. It becomes clear that the plaintiff has mentioned those facts purposely.

I fail to understand as to how the plaintiff can make certain assertions in the plaint that the appointment of defendants Nos. 7 to 9 on the boards of defendants Nos. 3 and 5 companies is illegal and fraudulent. The whole case of the alleged illegal shift of the balance of power in defendants Nos. 1 to 5 companies and the challenge to the appointment of defendants Nos. 7 to 9 is misconceived and it is not open to the plaintiff to urge this. In the plaint, the plaintiff not only failed to refer to his own participation in the appointment of defendants Nos. 7 to 9 in defendants Nos. 3 and 5 companies but also makes a bold assertion that such appointment was "concealed from him."

The principal contention of Mr. K. Parasaran, learned senior counsel for the plaintiff, is that there was a conspiracy conceived during RNG's lifetime to divest the plaintiff of his 37 per cent. shareholding. In answer to this contention, it was argued by Mr. P. Chidambaram, learned senior counsel for the sixth defendant, that whatever allegations of fraud and conspiracy are made by the plaintiff, the level of proof and the burden against him is very heavy. Each circumstance leading up to the conspiracy must be consistent only with the conspiracy theory sought to be established and must exclude every other hypothesis to the contrary. Reference was also made to the decision in S.P. Bhatnagar v. State of Maharashtra, AIR 1979 SC 826 ; Chandmal v. State of Rajasthan, AIR 1976 SC 917 and Sharad Birdichand Sarda v. State of Maharashtra, AIR 1984 SC 1622.

The following facts will also clearly establish, as contended by Mr. P. Chidambaram, learned senior counsel for the sixth defendant, that the allegations of conspiracy made by the plaintiff cannot be sustained and the question of estoppel or acquiescence on the part of the plaintiff can arise :

(a) The plaintiff's version is that the board meeting of September 26, 1990, and the annual general body meeting of September 27, 1990, were free from any controversy. This version is clearly negatived by the fact that in his letter of November 12, 1990, the plaintiff admits that RNG had, on September 26, 1990, asked him to return the shares and that RNG had lost faith in him. The plaintiff had tried to impose upon RNG the minutes prepared by Mr. Gurumurthy in which there was a marked emphasis upon the creation of a trust and that the plaintiff and the sixth defendant were to have equal status in the company. On account Of this controversy, RNG had lost faith in Mr. Gurumurthy, who had to disassociate himself from the "Express" group of companies in October, 1990.

(b) The plaintiffs assertion that the letter dated November 12, 1990, and the share transfer forms were extracted from the plaintiff by the seventh defendant on the ground that both the plaintiff and the sixth defendant were to execute transfer deeds in favour of RNG which is ex facie false as would appear from the letter dated November 12, 1990, which speaks of only loss of confidence in the plaintiff and not in the sixth defendant. The plaintiff, by letter dated November 12, 1990, sent the transfer deeds with regard to his exclusive shares or shares where he was the first holder and not with regard to 12.16 per cent. shares of which the sixth defendant was the first holder. From November 12, 1990, till date, the plaintiff has never sought to enquire as to what happened to the transfer deeds executed by him or alternatively put on record that the transfer deeds were never intended to be acted upon. The plaintiff further has never requested that the sixth defendant was also to transfer his holdings.

(c) The suggestion that the articles of association, which were amended on September 27, 1990, were never sought to be re-amended during the lifetime of RNG is an irrelevant circumstance. The substantial part of amendments of the articles dealt with the conferring upon RNG certain privileges. There could never have been any ground to take any action to amend that. In any case, the sixth defendant had never any desire to transfer his shareholdings to any third party and, therefore, there was never any occasion to seek any amendment of the articles as amended on September 27, 1990.'Furthermore, it is clear from the document that the 37 per cent. shares vested in RNG and he had not decided to transfer these shares to any other person during his lifetime. The fact that this was not done would not only show that there was no conspiracy but would militate against it.

(d) Allegations that the factum of the meeting dated January 5, 1991, was kept a secret are without any basis. The notice of the meeting was circulated. The decisions of the meeting were acted upon. Even on his own showing, the plaintiff, on March 16, 1991, was fully aware of the fact that such a meeting had been held and directors had been appointed. The plaintiff was always aware of the minutes of the meeting. His case that the minutes were kept away and not shown to him is falsified by two contradictory assertions in the two plaints. Moreover, if what the plaintiff says has any semblance of truth, it is inconceivable that a director of the company wanting to obtain a copy of the minutes which are denied to him, would not put a demand on record demanding a copy of the minutes.

(e) The alleged circumstance that directors were brought into various companies in absolute secrecy is falsified by the conduct of the plaintiff himself. I have already made reference to the submissions already advanced in this regard by Mr. P. Chidambaram.

(f) Allegations that Mr. Venu Srinivasan's office was used to file the annual returns of the company are explained by the simple fact that the plaintiff and certain officers close to him in the Madras office, viz., Mr. L. Seshan and Mr. N. Rajendrakumar were not sending the record when asked for by RNG in Bombay. They were not co-operating either with RNG or with the sixth defendant. They could not be trusted at this stage for filing the returns.

(g) The assertion that the cancelled pronote was not sent back to the plaintiff by RNG is an absolutely irrelevant circumstance and is not indicative of conspiracy. The pronote which was given in consideration of RNG transferring 37 per cent. shareholding to the plaintiff was cancelled. A letter to that effect was duly signed by RNG and sent to the plaintiff. The fact that only a letter was sent and the pronote was not sent is not a circumstance indicating conspiracy since in view of the cancellation, the pronote ceased to have any effect in law.

(h) The alleged circumstance that Mr. L. Seshan prepared the statement of assets and liabilities of RNG after his death and showed the shares as not transferred clearly corroborates the fact that Mr. Seshan is actively in collusion with the plaintiff as is demonstrated by his conduct.

The meeting dated September 24, 1991 of the board of directors of the Indian Express (Madurai) Private Limited held at Bombay is a crucial meeting for the following reasons : The meeting was attended by RNG, the sixth defendant and Mrs. Saroj Goenka. Leave of absence was granted to the plaintiff. Mrs. Saroj Goenka was elected as chairperson for the meeting. The chairperson mentioned that additional directors have been appointed in the holding company (first defendant company) and, therefore, the directors should consider the appointment of additional directors on the board of the third defendant company as well. She then tabled before the meeting, copies of the circular resolution which has been circulated to all the directors. She also mentioned that RNG, Vivek Khaitan and herself have all approved and accorded their consent to the circular resolution appointing Nusli N. Wadia (seventh defendant), Venu Srinivasan (eighth defendant) and Shrikrishna Mulgaokar (ninth defendant) as additional directors of the company with effect from June 24, 1991. The text of the circular resolution was then recorded by the board meeting. This is the meeting by which the plaintiff also became the joint managing director. A resolution to the said effect was also unanimously passed appointing the plaintiff, who was the executive director, as the re-designated joint managing director of the company from June 24, 1991, on the terms and conditions detailed therein in regard to his powers and duties. It is thus seen that the board itself can appoint additional directors and that the powers of the board have been validly exercised, which, in my view, does not call for any interference.

Mr. K. Parasaran, learned senior counsel for the plaintiff/applicant has cited the decision in Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp Cas 1, 4, 5 ; AIR 1973 SC 2389. In the said case, the services of the general manager were terminated at a board meeting. That meeting was convened without giving notice to one of the directors. The next day, the chairman sent a telegram to the general manager stating that his services had been terminated. Subsequently, at the next board meeting, the action of the chairman, who terminated the services by his letter and telegram, was ratified. It was held that the first board meeting, which was convened without giving notice to one of the directors, was invalid and the resolution passed to terminate the services of the general manager would be inoperative. However, on the peculiar facts of that case, it was held that the termination of services was effected by the chairman's telegram and letter which were subsequently ratified.

Relying on the above decision, Mr. K. Parasaran submits that the board meetings of January 5, 1991, of the first defendant company and of January 23, 1991, of the second defendant company would be invalid and the resolutions passed therein are inoperative as no notice was given to the plaintiff and his mother, who are the other directors of the first defendant company, and to the plaintiff and Mrs. Saroj Goenka, who are the other directors of the second defendant company. According to Mr. P. Chidambaram, learned senior counsel for the sixth defendant, the above decision is in favour of the sixth defendant and against the plaintiff. It is seen from para 14 of the said decision that it was open to a regularly constituted meeting of the board of directors to ratify that action which, though unauthorised, was done on behalf of the company and that the ratification would always relate back to the date of the act ratified and so it must be held that the services of the appellant were validly terminated on December 17, 1953, and that the appellant was not entitled to the declaration prayed for by him, and the trial court as well as the High Court were right in dismissing the claim. In the instant case, it is seen from the records that the minutes of the earlier meetings were discussed at the subsequent meetings. It is also proved that the plaintiff has attended several meetings and hence, he is not entitled to challenge the decision taken at the board meetings since the decision taken at the previous board meetings has been subsequently ratified in the next meeting.

The next decision relied on by Mr. K. Parasaran, learned senior counsel for the plaintiff, is in American Cyanamid Co. v. Ethicon Ltd. [1975] 1 All ER 504. This decision is by the House of Lords. There is no dispute with regard to the principles laid down by the House of Lords governing the grant of interlocutory injunction, which have been set out in detail in the said judgment. The House of Lords held that there was no rule of law which stipulated that a court should not grant interlocutory injunctions on a balance of convenience unless the plaintiff establishes a prima facie case or a probability that he would be successful at the trial of the action. The House of Lords further held that it was sufficient if the court was satisfied that the claim was not frivolous or vexatious and that there was a serious question to be tried and once this is established, the grant of interlocutory injunction would be passed on the balance of convenience. I am of the view that the said decision is not applicable to the facts of the case on hand and is distinguishable on facts. I have already held on facts that the plaintiff has not made out a prima facie case for the grant of injunction in his favour and that the balance of convenience is also not in his favour.

The decision in Dalpat Kumar v. Prahlad Singh [1992] 2 MLJ 49 ; [1992] 1 SCC 719 was also cited by Mr. K. Parasaran, wherein three principles to be applied for grant of temporary injunction have been laid down by the apex court.

Mr. P. Chidambaram, learned senior counsel for the sixth defendant, in support of his contention cited the decision in Imperial Oil Soap and General Mills Co. Ltd. v. Wazir Singh, AIR 1915 Lahore 478. In the above case, the company had filed a suit for recovery of certain sums of money. The plaint was signed by one of the directors. It was contended that the said director had no authority to institute the suit on behalf of the company. The defendant who had raised this objection was also a shareholder. The High Court observed that this defendant had actually participated in the appointment of the director who was representing the company. Further, this person had also functioned as director for several years. In such cases, the parties were held not entitled to question the powers of individual directors. Similarly, the shareholders who had joined in the appointment as directors without taking exception would be estopped from objecting to the validity of his appointment. In my opinion, this decision is really in favour of the defendants and not in favour of the plaintiff/applicant as contended by learned senior counsel for the plaintiff. It is specifically established that the plaintiff has joined in the appointment of defendants Nos. 7 to 9 and defendants Nos. 10 to 12 and has also participated in the board meetings subsequent to their appointment. The only contention raised by the plaintiff/applicant is that the appointment was made without his knowledge and the same was kept concealed from him as part of the conspiracy. I have already held that this is a matter which has to be gone into in detail only at the time of trial and that the theory of conspiracy has to be established only after a full-fledged trial. It is useful to refer to two passages of the judgment of the Division Bench of the Lahore High Court :

"When a company is shown to have accepted a certain person for many years as its director and has never on any occasion repudiated any of his acts as such, it is not open to one who has no concern with the company to challenge the appointment of such director or to contest his authority to act on behalf of the company.

When a shareholder of a company takes part in nearly all the general meetings of the company and joins in the annual appointment of its director without taking exception to his appointment, he is under the circumstances debarred by his conduct from objecting to the validity of the director's appointment or to his authority to act for and on behalf of the company."

Mr. P. Chidambaram then relied on the decision in John Shaw and Sons (Salford) Ltd. v. Peter Shaw and John Shaw [1935] 2 KB 113. The principles of section 291 of the Act have been set out in the above judgment. The relevant passage is reproduced :

"A company is an entity distinct alike from its shareholders and its directors. Some of its powers may, according to its articles, be exercised by directors, certain other powers may be reserved for the shareholders in general meeting. If powers of management are vested in the directors, they and they alone can exercise these powers..."

Mr. P. Chidambaram, learned senior counsel for the sixth defendant then relied on the decision in Peninsular Life Assurance Co., In re [1936] 6 Comp Cas 32 (Bom). In that case, the application was for rectification of the share register. The applicant claimed about an irregularity of a meeting stating that notice had not been given in respect of a board meeting. This point was taken only when the matter was part-heard. The objection was not taken even while filing inspection of all the records. The court observed that the shareholder should have proved that notice was not given to the opposing directors. In the present case, it is true, that the objections regarding the meeting have been taken in the plaint. The conduct of the plaintiff in this case will show that objection was not taken by him when the additional directors were present at the meetings. The burden of proof is on him to show that he had no notice. In the decision in Shuttleworth v. Cox Brothers and Co. Ltd. [1927] 2 KB 9, it was held that it was not for the court to manage the affairs of the company and that is for the shareholders and the directors. It is argued on behalf of the plaintiff that in the light of the above case, the court was concerned with the alteration of the articles of a company and hence, the said decision will also not be applicable to the facts of the present case. I am unable to accept the said contention. The decision has been relied on by learned senior counsel for the sixth defendant only for the purpose of showing that it is for the shareholders to decide whether it is for the benefit of the company and not for the court and that it was also not for the court to manage the affairs of the company and it is for the shareholders and the directors. In my opinion, the principle laid down in the above decision is applicable to the facts of the present case.

Three case-laws governing the principles of grant of injunction have been cited by Mr. P. Chidambaram, learned senior counsel for the sixth defendant. They are in United Commercial Bank v. Bank of India, AIR 1981 SC 1426 ; [1982] 52 Comp Cas 186 ; Hazrat Surat Shah Urdu Education Society v. Abdul Saheb [1988] 4 JT 232 (SC) and Dalpat Kumar v. Prahlad Singh [1992] 1 SCC 719. In the instant case, as already held by me, the plaintiff has failed to establish that he would be put to irreparable loss unless interim injunction was granted.

Mr. G.E. Vahan Vati, learned senior counsel appearing for the first defendant/first respondent, made three submissions :

(a) The decision with regard to the company as regards shares ;

(b) the decision with regard to the appointment of directors ;

(c) the decision with regard to the alleged shareholding of the plaintiff.

Points 1 and 2 relate to the transfer of shares and the alleged shareholding of Anil Kumar Sonthalia. A separate suit has been filed alleging conspiracy for divesting the plaintiff of his shareholding and also the shareholding of Anil Kumar Sonthalia, brother of the plaintiff, in regard to his shareholding. A number of applications have also been filed in the said suit, which are pending in this court. Hence, the contentions raised by learned senior counsel for the first defendant are not dealt with in this order and the same will be dealt with in the applications filed in the share transfer suit. So far as the appointment of additional directors is concerned, Mr. G.E. Vahan Vati, learned senior counsel, adopted the arguments of other learned senior counsel who appeared on behalf of the other defendants/respondents. Learned senior counsel has also invited my attention to the relevant paragraphs in the minutes of the board meetings and also other connected papers, which I have already referred to while dealing with the arguments of Mr. P. Chidambaram.

In a connected matter in Applications Nos. 841, 5129 and 5998 of 1992, by order dated April 13, 1993 (since reported in Vivek Goenka v. Manoj Sonthalia [1995] 83 Comp Cas 897), I have already dealt with the points in extenso and have observed that since the defendant/respondent companies are board-managed companies, the board of directors may exercise all the powers by virtue of section 291 of the Companies Act and the articles of association of the company and that the fundamental principle of corporate democracy, which is at the very foundation of the company law, was recognised by this court earlier and between March, 1991, and September, 1992, the plaintiff and Mrs. Saroj Goenka sat on the board of directors of the first and the third defendant companies and did not demur. In fact, the minutes show that the new directors appointed on January 5, 1991, were welcomed on the board. The main prayer in C. S. No. 1246 of 1992 is concerned with the validity of the meeting of the board of directors of the first defendant company held on January 5, 1991, and the board of directors meeting of the second defendant company held on January 23, 1991, and certain other resolutions for appointing additional directors. In my view, it will not be open to this court to interfere with the day to day functions, management and administration of a company unless it is established that the decisions taken by the board are ultra vires the Act or the articles of association of the company. I have consistently taken this view in my earlier orders. At this interlocutory stage, this court is concerned only with the prima facie case and the balance of convenience as disclosed by the documents produced by both the parties and it is for the plaintiff to let in oral evidence at the time of trial and establish his case.

The following important circumstances will conclusively militate against the conspiracy theory strenuously put forward by learned senior counsel for the plaintiff and highly suggestive of the hypothesis given by the sixth defendant to the effect that the plaintiff's relations with RNG got strained on account of the reasons mentioned in the pleadings. They are :

(a) Gurumurthi's draft of the minutes of the board meeting dated September 26, 1990, bears the corrections in hand by R.A. Shah and the plaintiff.

(b) The contents of the letter dated November 12, 1990.

(c) The letter dated January 2, 1991, of RNG cancelling the pronote.

(d) The notice of the meeting dated January 5, 1991, sent to the plaintiff.

(e) The knowledge/acquiescence and even active participation of the plaintiff in the appointment of the directors to various companies.

(f) The disillusionment of RNG with the Madras office in not sending the documents.

(g) Gurumurthi's disassociation from "Indian Express" on account of these factors in October, 1990 ; and

(h) The contents of Shri Achyut Patwardhan's letter.

During the hearing of the case, I suggested whether the plaintiff's power as joint managing director can be increased as a temporary measure and that the suit itself can be taken up and disposed of at the earliest stage. At the next hearing, Mr. R. Krishnamurthi, learned senior counsel for the sixth defendant, Mr. G.E. Vahan Vati, learned senior counsel for the first defendant and Mr. Navroz Seervai, learned senior counsel for the seventh defendant, appeared before me and represented that the financial powers of the plaintiff can be increased to some extent for which course Mr. Arvind P. Datar, learned counsel appearing for the plaintiff, was not agreeable. This court has suggested this only as an interim measure. Both the parties were not willing to give up their stand. Hence, I could not move about reapproachment between the parties. This is only by the way.

I make it clear that the views expressed by me in this common order are only for the purpose of disposing of the above applications on a prima facie consideration of the materials placed before this court at this interlocutory stage.

For the foregoing reasons, I hold that there are no merits in the applications filed by the plaintiff/applicant. Accordingly, all the applications are dismissed. However, there will be no order as to costs.

[1981] 51 COMP. CAS. 375 (DELHI)

HIGH COURT OF DELHI

New Bank of India Ltd.

v.

Union of India

S. RANGANATHAN AND D.R. KHANNA, JJ.

C.W.P. Nos. 665 and 787 of 1978.

FEBRUARY 27, 1980

G.L. Sanghi and C.L. Chopra for the Petitioner.

B.N. Lokur, K.L. Sharma and K.N. Kataria for the Respondent.

JUDGMENT

D.R. Khanna, J.—These two writ petitions bearing Nos. 665 and 787 of 1978, raise certain common questions of fact and law and are, therefore, being taken together.

Briefly stated, the controversy pertains to whether the transfer of shares which a debtor, on obtaining a loan from a bank, effects in the latter's favour in the course of extending security results in the creation of a trust and, therefore, necessitates the registration of trust with the Public Trustee in terms of s. 153B of the Companies Act.

Writ Petition No. 665 of 1978 has been brought by the New Bank of India Ltd. The respondents impleaded are the Union of India and the Public Trustee to the Government of India, Department of Company Affairs. It is averred that the petitioner-bank in the normal course of its banking business is having a large number of cash credit accounts against the security of shares, etc. One such account is being maintained by the Universal Investment Private Ltd. from December 12, 1968, at the bank's office in K-Block, Connaught Circus, New Delhi. The credit limit permissible in this account is up to Rs. 4,50,000. That concern has, apart from executing a pronote in favour of the bank for Rs. 4,50,000 as collateral security, handed over to the bank 67,600 shares of Rs. 10 each held by it in the Jaipur Udyog Ltd. and given blank transfer deeds as security towards the payment of the amount. A further agreement for cash credit account was executed by this concern on August 20, 1971, and the shares were pledged in favour of the bank. In terms thereof the bank was given full authority either to sell the shares or to get them transferred in its favour. The bank accordingly got those shares transferred in its name. This was also in accordance with the general practice of the bank when the amounts of loans exceeded Rs. 50,000.

It has further been averred that on 3rd November, 1976, the petitioner-bank received a letter from the Public Trustee requiring it to file a declaration (as per form enclosed) under s. 153B of the Companies Act. The bank, however, did not do so and rather contested the propriety of the notice on the ground that it was not a trustee but a mere pledgee, holding the shares as security towards realisations of the amount advanced which stood at over Rs. 7,90,000 on June 1, 1978. No instrument of trust in writing whatsoever was said to have been executed and this circumstance by itself, it was stated, excluded the application of s. 153B. However, in spite of this clarification given to the Public Trustee as also the clear provisions of law, the Public Trustee is insisting that the bank should abide by the provisions of s. 153B. This writ petition has, therefore, been filed seeking relief in the nature of a writ of certiorari and mandamus to the effect that the respondents should not proceed against the bank for the alleged contravention of the provisions of s. 153B of the Companies Act.

From the side of the respondents, a counter has been filed by Shri M.K. Kukreja, Public Trustee. In this, it has been stated that the transfer of the shares in favour of the bank as collateral security for the cash credit account did not create any beneficial interest in those shares in favour of the bank, and instead the same continued to be retained by the Universal Investment Trust Ltd. In this way, a trust was stated to have been created and the bank was estopped from disputing its legal character. It has further been urged that it would be necessary and proper to examine the true nature of the transaction, having regard to all the terms and conditions of the various documents. It has been denied that the bank is only a pledgee. Rather the ownership of the shares, it is pointed out, has been transferred in favour of the bank while the beneficial interest is still retained by the Universal Investment Trust Ltd., and thus a trust has come into being. It has also been denied that no instrument in writing creating the trust has been executed. The agreements and documents executed between the parties, it is pleaded, constituted the instruments in writing.

In the other Writ Petition No. 787 of 1978, the petitioner No. 1 is the Sutlej Cotton Mills Ltd. (hereinafter called "the Sutlej Cotton") and the petitioner No. 2 is the Gwalior Rayon Silk Manufacturing (Weaving) Company Ltd. (hereinafter called "the Gwalior Rayon"). The respondents impleaded are the Union of India, the Public Trustee and the Punjab National Bank, Bhawani Mandi. The facts enumerated are that the Sutlej Cotton pledged and/or deposited 1,46,000 equity shares of Rs. 10 each which it held in Gwalior Rayon with the Punjab National Bank, Bhawani Mandi, as collateral security, in consideration of the bank agreeing to stand guarantee for the machinery purchased by Sutlej Cotton's unit known as "Rajasthan Textile Mills" on deferred payment terms. Those shares were subsequently got registered with the Gwalior Rayon in the name of the bank during the period from February 24, 1975, to January 21, 1977. By this pledging and/or deposit of shares, a mere charge was created over the shares in favour of the bank which held them as a bailee for the specific purpose. A resolution of the board of directors of the Sutlej Cotton was passed on June 25, 1974, giving out the circumstances in which the shares were pledged and certain letters were also exchanged with the bank. The entire transaction, it has been claimed, in reality and in substance, amounted to a pledge and/or pawning within the meaning of s. 172 and other provisions contained in the Indian Contract Act.

It has further been stated in the petition that the Public Trustee has required the Punjab National Bank to file a declaration as trustee of those shares in terms of s. 153B of the Companies Act. Similarly, the Gwalior Rayon has been required to send all papers, notices, etc., concerning those shares to the Public Trustee. The Sutlej Cotton then refuted that any such trust had been created and instead pleaded that the bank's status was that of a pledgee. The notices were, therefore, required to be withdrawn. The Public Trustee, however, insisted in his designs and claimed to possess certain legal opinion from the Ministry of Law. That legal opinion, however, was not made available to the petitioners.

It has, therefore, been contended that the transaction between the Sutlej Cotton and the Punjab National Bank was a contract of bailment simpliciter, whereunder shares had been merely pledged and/or pawned as security, and no trust whatsoever had been in any manner created. Sections 153B and 187B of the Companies Act are, therefore, pleaded to be not applicable as they can be invoked only where a trust within the meaning of s. 3 of the Indian Trusts Act, 1882, had been created. A bailee, it is urged, cannot be termed as a trustee. The present writ has, therefore, been moved alleging that in case the petitioners did not comply with the demands of the Public Trustee, they were in all likelihood to suffer irreparable harm in the form of penalties, etc. Relief in the nature of mandamus, prohibition and certiorari has been sought.

From the side of the Public Trustee, a counter has been filed in which similar assertions have been made as already mentioned in the narration of facts of the other writ. The locus standi of Sutlej Cotton to move this writ has also been challenged. Rather, the notices and letters of the Public Trustee were stated to be all addressed to Gwalior Rayon by the Punjab National Bank. It is reiterated that the bank has become a trustee of the shares within the meaning of the expression under s. 153B of the Companies Act, particularly when the shares stand transferred in its favour. Trusts, it is pleaded, are of various kinds and included constructive trusts also. The expressions "trust" and "trustee" appearing in s. 153B, it has been urged, are used in a general sense and not in the technical sense given to them by s. 3 of the Indian Trusts Act. The beneficial interest in those shares, it is pointed out, still vests in the Sutlej Cotton.

Various documents have been filed from the side of the petitioners. One of them dated April 3, 1974, is addressed by the Punjab National Bank to the Rajasthan Textile Mills Unit of the Sutlej Cotton in which it was intimated that the bank had extended deferred payment guarantees for an amount of Rs. 36.50 lakhs. The securities required from the Rajasthan Textile Mills were the counter-indemnity and the pledge of shares of Gwalior Rayon to the extent of 125% of the guarantee amount. The charge was to be got registered with the Registrar of Joint Stock Companies and the shares also transferred in the name of the bank as per rules.

Another document shows that the Punjab National Bank in compliance with the notice of the Public Trustee submitted the required declaration under s. 153B of the Companies Act with the Public Trustee in which it was mentioned that shares of the face value of 14.60 lakhs of the Gwalior Rayon were lying transferred to it as collateral security against D.P.G. and term loan. The beneficiary was stated to be the Sutlej Cotton. In a note written under this declaration it was, however, mentioned that the shares were held as a pawnee and not as a trustee. Copies of documents under which the shares were held were enclosed.

The copy of the resolution dated June 25, 1974, of the board of directors of the Sutlej Cotton, about which reference has been made above, stated that capital expenditure of Rs. 58,00,000, inter alia, for modernization of the company's textile mills at Bhawani was to be incurred. Some of the machineries were also to be purchased on deferred payment terms and for this purpose the company had approached the Punjab National Bank for sanction of a deferred payment guarantee limit of Rs. 30.50 lakhs. The bank had agreed to the same. The pledging of all the shares held by the company in the Gwalior Rayon with the bank was, therefore, authorised to the extent of 125% of the guarantee amount as security.

Another document filed is a circular issued by the Punjab National Bank, head office, to all its branches in which reference has been made to a directive issued by the Reserve Bank of India dated August 28, 1970, regarding advances against shares. It is enjoined therein that where credit facilities of over Rs. 50,000 on the security of shares are extended, the shares must be transferred in the name of the bank, and the bank shall have exclusive voting rights in respect thereof. It contains specific prohibition against the advance of credits. Where such voting rights are not so transferred to the bank, those voting rights, it is further provided, have to be exercised with the prior approval of the Reserve Bank of India and in accordance with such directions as may be given by the Reserve Bank of India.

In this case also, the Sutlej Cotton executed a pronote in favour of the bank for an amount of Rs. 65,00,000. Another document dated January 12, 1973, brought out the terms and conditions of the cash credit account (fresh) mentioning the overdraft facility of Rs. 65,00,000. There is a narration in it of the deferred payment guarantee and of the counter-indemnity from the company and the pledge of shares. In another letter, the name of the company in which the shares were held, namely, the Gwalior Rayon, was elaborated and an hypothecation agreement was also executed on September 3, 1973. While forwarding the shares to the bank, the Sutlej Cotton in its letter dated August 8, 1973, mentioned that they were being sent as security for issuing the deferred payment guarantee. The bank, however, informed in writing that the shares be transferred in its favour. This was done accordingly.

During the course of the hearing of this writ moved by the Sutlej Cotton and the Gwalior Rayon, it was found that the Punjab National Bank had not made any appearance. The other respondents, therefore, sought that the bank should be required to produce the documents which the Sutlej Cotton might have executed while obtaining credit and the transfer of shares. Directions were, therefore, issued to the bank to file those documents. Some documents were thereafter filed along with an affidavit to the effect that, apart from them, no other document existed in the possession of the bank. It thus appears that no formal document was executed between the bank and the Sutlej Cotton about the pledging of the shares.

Section 153B of the Companies Act, 1956, under which the Public Trustee has required the two banks to file declarations, is to the following effect:

"153B. (1) Notwithstanding anything contained in section 153, where any shares in, or debentures of, a company are held in trust by any person (hereinafter referred to as the trustee), the trustee shall, within such time and in such form as may be prescribed, make a declaration to the public trustee.

(2) A copy of the declaration made under sub-section (1) shall be sent by the trustee to the company concerned, within twenty-one days, after the declaration has been sent to the Public Trustee.

(3) (a) If a trustee fails to make a declaration as required by this section, he shall be punishable with fine which may extend to five thousand rupees and in the case of a continuing failure, with a further fine which may extend to one hundred rupees for every day during which the failure continues.

(b) If a trustee makes in a declaration aforesaid any statement which is false and which he knows or believes to be false or does not believe to be true, he shall be punishable with imprisonment for a term which may extend to two years and also with fine.

(4) The provisions of this section and section 187B shall not apply in relation to a trust—

(a) where the trust is not created by an instrument in writting;

(b) even if the trust is created by an instrument in writing, where the value of the shares in, or debentures of, a company, held in trust—

(i) does not exceed one lakh of rupees; or

(ii) exceeds one lakh of rupees but does not exceed either five lakhs of rupees or twenty-five per cent. of the paid-up share capital of the company, whichever is less.

Explanation.—The expression 'the value of the shares in, or debentures of, a company' in clause (b) means,—

(i) in the case of shares or debentures acquired by way of allotment or transfer for consideration, the cost of acquisition thereof, and

(ii) in any other case, the paid-up value of the shares or debentures".

These provisions thus show that the shares must be held in trust and that such trust must have been created by an instrument in writing. Of course, the value of the shares must exceed rupees one lakh. The consequence of the trustee not filing the declaration invites penalty of Rs. 5,000 and in the case of continuing failure, a further fine which may extend to Rs. 100 for every day's default.

Section 187B further enjoins that the rights and powers (including the right to vote by proxy) exercisable at any meeting of the company, etc., cease to vest in the trustee but become exercisable by the Public Trustee. The latter is empowered to attend the meetings and exercise these rights and powers himself or require the trustee to do so under his directions. The Public Trustee, however, may abstain from exercising these rights and powers, if in his opinion the object of the trust or the interest of the beneficiaries of the trust are not likely to be adversely affected by such abstention. The trustee on his part may advise the Public Trustee but it is left to the latter's discretion to accept or reject the same. The Public Trustee is also conferred the rights and powers to receive and inspect all books and papers which a member is entitled to receive and inspect.

Section 187C makes provision for the filing of declarations with the companies concerned by the holders of shares who do not hold the beneficial interest in such shares. Similar requirement is enjoined on the holders of beneficial interests also. On their failure to file such declarations without any reasonable excuse, they can be burdened with a fine of Rs. 1,000 per day during which the failure continues. Sub-section (6) of the same section is to the following effect:

"Any charge, promissory note or any other collateral agreement, created, executed or entered into in relation to any share, by the ostensible owner thereof, or any hypothecation by the ostensible owner of any share, in respect of which a declaration is required to be made under the foregoing provisions of this section, but not so declared, shall not be enforceable by the beneficial owner or any person claiming through him".

Section 153, to which reference is made in s. 153B, lays down that no notice of trust, express, implied or constructive, shall be entered on the register of members or of debenture-holders. Thus, it purports to include obligations in the nature of a trust as enumerated in Chap. IX of the Indian Trusts Act, 1882.

However, s. 153B when it makes mention of trusts, does not elaborate the inclusion of implied or constructive trusts, or what may be termed as obligations in the nature of trust. The circumstance that sub-s. (4) enjoins the creation of a trust by an instrument in writing before this section can come into play further tends to exclude implied or constructive trusts or obligations in the nature of a trust. One has, therefore, to look to the definition of trust as given in s. 3 of the Indian Trusts Act for understanding the import of this expression under s. 153B. The same envisages that a "trust" is an obligation annexed to the ownership of property, and arising out of confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.

The Bombay High Court has thus in the case of Tan Bug Taim v. Collector of Bombay, AIR 1946 Bom 216, observed that the very heading of Chap. IX and the terms of s. 80 of the Indian Trusts Act show that the relationships provided for in Chap. IX are not trusts but obligations in the nature of trusts and, therefore, it cannot be said that merely because those obligations were enacted within the provisions of that Act, they were included in the definition or conception of trusts which only were the subject-matter of the enactment of that Act.

The Patna High Court has also held in the case of Nandkishore Bajoria v. Gaya Sugar Mills Ltd., AIR 1953 Patna 390, that s. 185 of the Indian Companies Act, 1913, was confined to trusts as defined in s. 3 of the Trusts Act. Distinction was drawn between an express trust and a constructive trust. The later category was opined as not covered by the provisions of s. 185 of the Indian Companies Act, 1913.

From the side of the Public Trustee, it has been contended that the word "trust" as used in s. 153B has not to be understood in the legal concept as envisaged by the Indian Trusts Act, but has to be given the common parlance meaning of faith or confidence reposed. The same was claimed as analogous to trust or confidence or tacit belief which one may have in another.

In our opinion, however, when certain terms have become words of well-recognised legal import, they have to be understood as such when found introduced in any statute, unless they are denned otherwise or are stated in a different context. There is, therefore, no reason to ascribe a different meaning to the word "trust" occurring in s. 153B of the Companies Act from what has come to be understood in the context of the Indian Trusts Act. The Punjab High Court has, in the case of S. Ripudaman v. Surinder Kumar, AIR 1959 Punj 92, taken note of the implication of a trust under that Act and observed that it subjected the person, by whom a property was held, to equitable duties to deal with the property for the benefit of another, and in the case of an express trust arising from the intention of a person to create a trust directly or indirectly, it was the manifestation of intention and not the actual intention which determined whether a trust had been created. A number of features, it was next held, distinguished a trust from a contract. Trust always involved an equitable ownership whereas a contract was a legal obligation based on an undertaking supported by a consideration, which obligation may or may not be fiduciary in character. The beneficiary of a trust had the beneficial interest in the trust property, the beneficiary of a contract had only a personal claim against the promisor.

In the present cases, no formal instruments of trust stand executed as envisaged by sub-s. (4) of s. 153B of the Companies Act, 1956. However, this circumstance should not preclude the ascertainment whether the creation of trusts could be deduced from a number of documents executed between the concerned parties.

Before proceeding further, it may be relevant here to mention what was the object which induced the Legislature to introduce the provisions contained in ss. 153B, 187A and 187B. A perusal, in this respect, of the Guide to the Companies Act, by A. Ramaiya (8th Edn., 1977), at p. 329, shows that the Finance Minister, while elaborating the object and scope of these sections at various stages of the Bill, explained that while the Government had no intention to interfere with the position of trust equities, it had often happened that certain types of trusts held large amounts of equities and the people who were in management of these trusts used those equities for the purpose of having control. Such groups of persons, it had been noted, were defeating the various other provisions which tended to limit the amount of control by excessive acquisition of equity capital in their hands by holding them in the form of trust and then becoming trustees themselves. The result was that trust funds were being invested and utilised for furthering the donor's business interests than of the beneficiaries. The intention of these provisions was, therefore, not to interfere in the affairs of genuine trusts but to prevent the holding of securities by trusts to be used by a group of persons for the purpose of augmenting their own voting rights. A public trustee was, therefore, sought to be appointed to whom the exercise of voting rights was to be transferred.

We next advert to the facts of the present cases as to what in substance were the nature of loan accounts and whether the transfer of shares in the form of extending securities in favour of the banks did result in the creation of trusts as envisaged by s. 153B of the Companies Act. Ex facie, three factors were already discernible. Firstly, though the shares stood transferred in the names of the banks, the dividends accrued on them were credited to the respective cash credit accounts of the debtors. Thus, the benefit of those dividends was accruing to them. There was further an obligation to transfer back the shares to the debtors once the accounts were squared up. Thirdly, according to the Public Trustee, the voting rights were also being exercised by the banks at the behest of the debtors. In this way, the main ingredients of trusts were pointed out to be clearly made out. The present, it is stated, are cases of trust oriented pledges, and not pledge-oriented trusts. In the former case, it has been pleaded, it did not make much difference if some element of pledge also co-existed. A pledge, it is pointed out, normally does not require transfer of ownership. The existence of such transfers, in the present cases, thus is a pointer to the creation of trusts and that the banks are holding the shares for the benefit of the original holders.

From the side of the petitioners, however, it has been urged that the creation of a trust is primarily a matter of intention and overt act of the concerned parties. In the present cases both the debtors and the banks have not claimed that any trusts have come into being. They make no secret that the transfers of shares were in the course of extending securities for the loans. None had thus the intention to create trusts and, therefore, the Public Trustee is not justified to thrust such trusts on them.

In our considered opinion, it is the entire course of conduct and dealings which must be kept in view. One cannot be oblivious that there can be cases where the legal effect of such course of dealings may, in fact, result in the creation of trusts though the parties may not have envisaged so. There should be no reason not to give effect to such trusts if they otherwise satisfy the ingredients of a legal trust. Thus, the Bombay High Court in the case of Fazalbhai Mills Ltd. (In liquidation), In re [1936] 6 Comp Cas 351; AIR 1936 Bom 296, observed that fiduciary relationship may be established without the use of the word "trust". A person may become a trustee by his own acts and conduct so as to deprive himself of all beneficial ownership of a property and declare that he will hold the same in trust for another. The mere fact that the owner retains an interest in the property would not necessarily go against the foundation of a trust.

However, the significant factor, which pervades the entire course of dealings is that the transfers of shares in favour of the banks were effected primarily for the purpose of providing securities to the loan accounts. It was not within the purview of the parties, nor was it intended that thereby they were creating any trusts. This is amply reflected from the circumstance how they have vigorously contested in these writs the creation of any such trusts. In fact, these transfers seem to have resulted from the directives of the Reserve Bank of India to which reference had already been made above. The real object behind them continued to be to obtain absolute safeguard for the loans advanced. Perhaps it could as well be said that the necessity for these transfers was dictated by the desire to secure fully the interest of the bank lest any surreptitious disposing of those shares by the debtors in any manner took place.

The present are not cases of the nature where trusts are created to enable individuals to derive personal advantages by way of control over companies to curb which s. 153B was introduced in the Companies Act. Rather the banks have obtained transfers of shares for protection of their own interest and for their benefit. This does not appear compatible with the creation of a trust as in that case the beneficiary should be a third party or such party and the owner. Furthermore, a trustee is generally not entitled to dispose of or appropriate the trust property for his benefit. In the present cases, however, the rights of the banks to appropriate the shares to their benefit or dispose them of and utilise the amounts thereof for adjustment of the loan amounts due to them, in case the debtors do not discharge them, remain. The obligation requiring the transfer of shares back to the debtors can only arise where the debtors clear their dues to the banks on the basis of those loans. All these thus plainly show that the retention of shares by the banks during the subsistence of the loans is for the protection of their own interest.

In so far as the credit of the dividend amounts received by the banks in the cash credit accounts of the debtors, it would, no doubt, seemingly appear that the beneficial interest in those dividends remains with the debtors. However, a careful scrutiny would bring out that this is what superficially seems to be so. In reality, the banks are partly recovering the amounts of the loans advanced by them by appropriating the dividends towards the amounts due to them.

We are further of the opinion that there appears no basis for the Public Trustee to assume that the voting rights are retained by the debtors even after the transfer of the shares to the banks. The Reserve Bank directive in this regard makes the matter sufficiently clear. It is enjoined that those voting rights are exercisable by the banks only, and that too under the directions of the Reserve Bank. Thus, an equally independent body keeps supervision and control over the exercise of those voting rights which can rule out any connivance of misfeasance. There is nothing to assume that the banks have any ulterior objects to enter into collusions to enable individuals to derive personal gains or to unwarrantedly abdicate their voting powers incidental to the transfer of shares in their favour, which the Reserve Bank has so specifically required to be retained. The Reserve Bank plays as good a role as a watch dog in this respect as the Public Trustee could, and in case of any default, the Public Trustee may in his advisory capacity guide the Reserve Bank.

We are, therefore, of the considered opinion that in the circumstances of the present cases, it could not be said that any trusts were created when the banks got the shares in dispute transferred in their favour as a sort of security for the loan amounts advanced by them.

As regards the locus standi of the Gwalior Rayon to move the writ, it was clearly there, as it would have suffered penalties in case it did not serve notices and other documents on the Public Trustee. The Sutlej Cotton, however, it seems has no right over the shares as long as they stand transferred in favour of the bank and the loan amount is not discharged. However, it cannot here also be ignored that the transfer of these shares was in the context of extending security to the loan and the company has a right to obtain back their transfer as and when the loan is discharged.

The result, therefore, is that we allow these writs to the extent that the notices issued by the Public Trustee to the petitioners and the Punjab National Bank are quashed, and the Public Trustee is restrained from proceeding against the petitioners for any violation of those notices. Looking at the circumstances, we make no order as to costs.

Ranganathan J.—I agree. I think that in interpreting s. 153B one should give due weight to the very careful language used in it, particularly when considered in contrast with that employed in s. 153 and s. 187C. Section 153 is very widely worded and embraces within its sweep all types of trusts, express, implied or constructive. Section 187C, again, though somewhat akin to s. 153B, has a wide application and seeks disclosure of all types of beneficial interest in shares; in particular, sub-s. (6) thereof covers, by specific mention, charges, hypothecation and all types of agreements "created, executed or entered into" in relation to any share. Section 153B, on the other hand, is narrow in scope and takes in only cases where shares are held by a person under a trust created by an instrument in writing. The decisions referred to by my learned brother show that the expression, "trust", used in similar contexts, has been held applicable only to express trusts and as not appropriate to comprehend obligations in the nature of trusts or constructive trusts. Having regard to these considerations, I think that s. 187B is attracted only where one or more documents expressly create or constitute a trust in the full sense of s. 3 of the Trusts Act where a person transfers property to another with certain obligations annexed thereto as a result of confidence reposed by him in that other and declared and accepted by the other and not merely where some sort of fiduciary obligations can be spelt out from several documents executed by and between the parties.

[1983] 53 COMP. CAS. 500 (BOM)

HIGH COURT OF BOMBAY

Commissioner of Income-Tax

v.

Indian Hotels Co. Ltd.

M.N. CHANDURKAR AND M.H. KANIA JJ.

INCOME-TAX REFERENCE NO. 70 OF 1973

FEBRUARY 24, 1982

R.J. Joshi and R.L. Butani for the Applicant

D. Vyas, Subhash Shetty and R.M. Kadam for the Respondent.

JUDGMENT

The judgment of the court was delivered by

Chanduekar J.—The main question which arises in this reference is whether the assessee-company, the Indian Hotels Co. Ltd., is a company in which the public are substantially interested as the majority of the shares are held by charitable trusts.

The year of assessment in this reference is 1967-68, for which the previous year ended on 31st March, 1967. The share capital of the assessee-company consists of 6,000 shares of Rs. 500 each held by various shareholders as indicated below :

Names of shareholders	No. of shares
Tata Sons Pvt. Ltd.	1,051
Lady Tata Memorial Trust—Trustees Lady Navajbai Ratan Tata, Mr. J.R.D. Tata, Sir H.P. Mody, Mr. J.D. Choksi, Mr. D.R.D. Tata, Mrs. V.J. Vesugar and Mr. R.D. Choksi	1,400
Sir D.J. Tata Trust—Trustees: Lady Navajbai Ratan Tata, Mr. J.R.D. Tata, Sir H.P. Mody, Mr. A.D. Shroff, Dr. John Mathai, Mr. N.H. Tata and Mr. R.D. Choksi	2,995
Sir Ratan Tata Charities—Trustees : Lady Navajbai Ratan Tata, Mr. N.H. Tata, Sir H.P. Dastur, Mr. N.H. Coyajee, Mr. N.K. Suntook and Mr. K.A.D. Naorojee	500
Mr. D.R.D. Tata	6
Tata Sons Pvt. Ltd. and Mr. J.R.D. Tata	6
Tata Sons Pvt. Ltd. and Sir H.P. Mody	6
Tata Sons Pvt. Ltd. and J.D. Choksi	6
Tata Sons Pvt, Ltd. and Mr. K.C. Bakhle	6
Tata Sons Pvt. Ltd. and Mr. T.V. Baddeley	6
Tata Sons Pvt. Ltd. and Mr. L. Sawhny	6
Tata Sons Pvt. Ltd. and Mr. J.J. Bhabha	6
Tata Sons Pvt. Ltd. and Mr. R.D. Choksi	6

Thus out of 6,000 shares, 4,895 shares, which come to about 81% of the total number of shares of the assessee-company, are held by the three trusts referred to above. All the three trusts are public charitable trusts.

In the assessment proceedings for the assessment year 1967-68, the company claimed that it should be treated as a "company in which the public are substantially interested" in terms of s. 2(18) of the I.T. Act, 1961 (hereinafter referred to as "the Act"), on the ground that the majority of the shares are held by the public charitable trusts. This contention was not accepted by the ITO and the assessee-company challenged the order of the ITO by an appeal before the AAC. The AAC also rejected the contention of the assessee-company that it was a company in which the public were substantially interested and he held that since more than 99% of the voting power is held by three persons, the company was "caught by the mischief of section 2(18)(b)(iii)". He held that the ITO was justified in not treating the company as a company in which the public are substantially interested.

The assessee-company then appealed to the Income-tax Appellate Tribunal. Before the Tribunal the argument advanced on behalf of the assessee-company was that the majority of the shares were ostensibly held by the trusts and as the trusts were for the benefit of the public, the public had an interest in the trust and the shares were beneficially held by the public. It was also argued that the shares were ostensibly held by less than five persons, yet they were, in fact, beneficially held by the public and the public were holding the shares through the trustees. The Tribunal declined to accept the argument that as 81% of the shares of the company were held by the three public charitable trusts, the shares should be taken to have been held by the public for the purpose of s. 2(18) of the Act. The Tribunal held that in the case of a trust, the trustees have merely to carry out the wishes of the settlor and the beneficiaries have no say as to how those wishes have to be carried out and if shares of a company are held by charitable trusts, primarily, the voting power in respect of those shares will be governed by the directions given by the settlor and in the absence of such directions, the voting power will be exercised according to the wishes of the trustees. Consequently, according to the Tribunal, it was not possible to hold that in the case of a public charitable trust, the voting power vested in the public.

An alternative argument was also advanced before the Tribunal on behalf of the assessee-company that having regard to the provisions of s. 187B of the Companies Act, 1956, the shares, in respect of which the voting power is exercisable by the public trustee under that section, should be regarded as held by the "public". It was argued before the Tribunal that public trusts which are shareholders of the assessee-company fell within the ambit of s. 187B of the Companies Act and, consequently, the voting power in respect of more than 50% of the shares of the assessee-company was exercisable by the "public trustee" under s. 187B. It was further argued before the Tribunal that the "public trustee", being a nominee of the Government, would represent the public and the control of the voting power by the public trustee should be taken as control by the public and, therefore, the shares held by the public charitable trusts should be regarded as held by the public and the assessee-company should have been treated as a company in which the public were substantially interested. This alternative argument was accepted by the Tribunal, which took the view that under s. 187B of the Companies Act, in the case of every trust, the rights and powers including the right to vote exercisable at any meeting of the company of which shares are held by the trust, shall be exercisable by the public trustee and since the public trustee was a nominee of the Government and the Government would represent the people, it could be said that the voting power in respect of the shares held by the trust is ultimately exercisable by the Government on behalf of the public and so, the shares were held by the public. Having accepted the alternative argument advanced before it the Tribunal came to the conclusion that as the shares in the assessee-company were held by the three trusts, the same can be said to be held by the public and the assessee-company should be held as a company in which the public are substantially interested.

Arising out of this order of the Tribunal, the following question has been referred to this court under s. 256(1) of the Act for opinion :

"Whether, on the facts and in the circumstances of the case, the assessee is a 'company in which the public are substantially interested' within the terms of section 2(18) of the Income-tax Act, 1961 ?"

Before we notice the arguments advanced on behalf of the Revenue and the assessee-company, it is necessary to reproduce the material part of the definition of "company in which the public are substantially interested" in s. 2(18) of the Act as in force in the relevant assessment year. The definition ran thus :

"2. (18) 'Company in which the public are substantially interested'.— A company is said to be a company in which the public are substantially interested—...

(b) if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and

(i) its shares (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent. of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by—...

(d) the public (not being a director, or a company to which this clause does not apply);

(ii) the said shares were at any time during the relevant previous year the subject of dealing in any recognised stock exchange in India or were freely transferable by the holder to the other members of the public; and

(iii) the affairs of the company, or the shares carrying more than fifty per cent. of its total voting power were at no time during the relevant previous year controlled or held by five or less persons. "

The Explanation which provides for the manner in which the number of five or less persons is to be computed is not relevant for our purpose. It may be pointed out that this definition is analogous to the provision in Expln. 1 in s. 23A of the Indian I.T. Act, 1922, under which a company was to be deemed to be a company in which the public are substantially interested if shares of the company (not being shares entitled to a fixed rate of dividend, whether with or without a further right to participate in profits), carrying not less than fifty per cent. of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the previous year beneficially held by the Government or a corporation established by a Central, State or Provincial Act or the public (not including a company to which the provisions of s. 23A apply). The proportion of fifty per cent. referred to above was originally 25%.

Now, the argument on behalf of the Revenue advanced before us is that the Tribunal having held that the shares held by the three charitable trusts could not be considered as shares held by the public, the Tribunal should have held that the assessee-company was not a company in which the public were substantially interested. According to the learned counsel for the Revenue, the Tribunal was in error in holding that in view of the provisions of s. 187B of the Companies Act, the shares must be treated as having been held by the public. According to the learned counsel, the provisions of s. 187B of the Companies Act have no relevance in the determination of the question as to whether 50% of the shares are unconditionally and beneficially held by the public and it is argued that notwithstanding the provisions of s. 187B of the Companies Act, the shares continued to be held by the trustees of the public trusts and that though the trustees of the public trusts could be members of the public, the shares not having been held by the trustees for their own benefit, they could not be said to be beneficially holding the shares and, consequently, one of the requirements of s. 2(18) was not satisfied. The learned counsel also contended that having regard to the decisions of the Supreme Court in Raghuvanshi Mills Ltd. v. CIT [1961] 41 ITR 613, CIT v. Jubilee Mills Ltd. [1963] 48 ITR (SC) 9 and CIT v. East Coast Commercial Co. Ltd. [1967] 63 ITR 449, the trustees of the three trusts, who among themselves held 81% of the shares, really formed a group who would be in a position to control the business of the company and in whom more than 50% of the voting power was concentrated and the shares held by them could not be said to be unconditionally and beneficially held by the public.

Mr. Vyas appearing on behalf of the assessee-company has contended that the provisions of s. 2(18) must be reasonably construed and, according to the learned counsel, the beneficiaries under the three trusts, who held the shares, were members of the public and on a reasonable construction of the provisions of s. 2(18), it must be held that the shares were acquired by the trustees as members of the public and were held for the benefit of the public. Thus, according to the learned counsel, though the shares are held by a person, it is possible that beneficial interest in those shares is held by the members of the public and the shares standing in the names of the trustees must be held as having been acquired by members of the public. The learned counsel argued that for the purposes of s. 2(18) of the Act it is enough that the shares are held by the public and in a case where there are beneficiaries of a public trust, the shares must be treated as being beneficially held by the beneficiaries through the trusts. The learned counsel went a step further and contended that in such a case, the voting power vests in the public but through the trustees. The learned counsel posed a question that the shares have to be held beneficially by somebody and answered it by saying that if it was not suggested that the shares were held by the trustees themselves for their own benefit, then the shares must be said to have been held beneficially by the public. In support of the contention that the statute must be reasonably construed and a construction in consonance with justice should be adopted, the learned counsel has relied on the decision of the Supreme Court in R.B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570, in which the Supreme Court has observed that though it is true that equitable considerations are irrelevant in interpreting tax laws, those laws like all other laws have to be interpreted reasonably and in consonance with justice. Our attention was also invited to another decision of the Supreme Court in CIT v. National Taj Traders [1980] 121 ITR 535, where the Supreme Court was dealing with two principles of construction, namely, one relating to casus omissus and the other in regard to reading the statute as a whole. With regard to the latter principle the Supreme Court quoted with approval the observations in Maxwell on the Interpretation of Statutes, 12th Edn. at p. 47 and it will appear from that decision that the Supreme Court was mainly dealing with the principle of casus omissus, as would be clear from the following observations (p. 541):

"In other words, under the first principle a casus omissus cannot be supplied by the court except in the case of clear necessity and when reason for it is found in the four corners of the statute itself but at the same time a casus omissus should not be readily inferred and for that purpose all the parts of a statute or section must be construed together and every clause of a section should be construed with reference to the context and other clauses thereof so that the construction to be put on a particular provision makes a consistent enactment of the whole statute. This would be more so if literal construction of a particular clause leads to manifestly absurd or anomalous results which could not have been intended by the legislature. 'An intention to produce an unreasonable result', said Danckwerts L.J. in Artemiou v. Procopiou [1966] 1 QB 878 (CA), 'is not to be imputed to a statute if there is some other construction available'. Where to apply words literally would 'defeat the obvious intention of the legislation and produce a wholly unreasonable result' we must 'do some violence to the words' and so achieve that obvious intention and produce a rational construction.... "

While it is hard to dispute the proposition that tax laws are to be interpreted reasonably and in consonance with justice, it is also well established that any equitable considerations are wholly irrelevant in interpreting tax laws. It is not contended on behalf of the Revenue that the provisions of s. 2(18) should be construed in any manner other than the one permissible by the established principles of construction of statutes and the argument of the learned counsel for the Revenue has mainly proceeded on the construction placed on a similar concept of a company in which the public are substantially interested propounded by the Supreme Court in the three cases referred to above in the context of the provisions of s. 23A of the Indian I.T. Act, 1922.

Before, however, we go to the provisions of s. 2(18) of the Act, we must dispose of the contention advanced on behalf of the Revenue that the Tribunal was in error in holding that in a case where s. 187B operates or is attracted, the shares must be taken to be held by the public merely on the ground that the voting power is exercised by the public trustee. In all fairness to the learned counsel for the assessee-company, we must mention that it was not possible for the learned counsel to support the reasoning of the Tribunal in para. 8 of its appellate order.

It is undoubtedly true that the effect of the provisions of s. 187B of the Companies Act is that where any shares in a company are held in trust by a person referred to as "trustee" in the section, the right and powers (including the right to vote by proxy), exercisable at any meeting of the company or at any meeting of any class of members of the company by the trustee as a member of the company cease to be exercisable by the trustee as such member and becomes exercisable by the public trustee. Under sub-s. (2) of s. 187B, it is open to the public trustee instead of himself attending the meeting and exercising his rights and powers as aforesaid, to appoint as his proxy an officer of Government or the trustee himself to attend such meeting and to exercise such rights and powers in accordance with the directions of the public trustee. Under the proviso to sub-s. (2) it is provided that where the trustee is appointed by the public trustee as his proxy, the trustee shall be entitled, notwithstanding anything contained in any other provisions of the Companies Act, to exercise such rights and powers in the same manner as he would have been but for the provisions of s. 187B. Sub-section (3) provides that the public trustee may abstain from exercising the rights and powers conferred on him by the section if, in his opinion, the objects of the trust or the interests of the beneficiaries of the trust are not likely to be adversely affected by such abstention. Sub-sections (4) and (5) are not very relevant. Sub-section (6) then provides that in order to enable the public trustee to exercise the rights and powers aforesaid, the public trustee shall also be entitled to receive and inspect all books and papers under the Act which a member is entitled to receive and inspect.

Now, the limited effect of s. 187B is that the rights and powers exercisable at a meeting of the company or at any meeting of any class of members of a company cease to be exercisable by the trustee and those rights and powers become exercisable by the public trustee. The scope of s. 187B is, therefore, of a very limited character. It does not have the effect of divesting a trustee who is a shareholder of all rights which vest in him as a shareholder. The trustee does not cease to be a member of the company and s. 187B does not have the effect of substituting the public trustee as a member of the company in place of a trustee who holds shares as a trustee. If a member is not divested of the shares held by him and only his right to vote which he exercises as a member of the company at any meeting is taken away and vested in the public trustee, it is difficult to appreciate the view taken by the Tribunal that because the public trustee exercises the right to vote, the right to vote must be treated as being exercised by the Government itself and further that since Government acts on behalf of the public at large, the shares must be treated as having been held by the public. Apart from the fact, that, as we shall presently point out, the word "public" is used in a particular sense in s. 2(18), the ground on which the Tribunal has held that the assessee-company must be treated as a company in which the public are substantially interested is wholly untenable and the view of the Tribunal is based on a misconception of the scope, purpose and the effect of s. 187B of the Companies Act.

Coming now to the main argument, on behalf of the Revenue that shares carrying not less than 50% of the voting power have not been allotted unconditionally to, or acquired unconditionally by, and were not throughout the relevant previous year beneficially held by the public, it is necessary to analyse the relevant provisions in s. 2(18)(b). The three clauses, viz., cls. (i), (ii) and (iii) of s. 2(18)(b) will show that the conditions prescribed in those clauses have to be cumulatively satisfied. In so far as cl. (i) is concerned, it is necessary that the company must not be a private company as defined in the Companies Act, 1956, and this will apply to all the three clauses, and further the shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits), carrying not less than fifty per cent. of the voting power must be shown either to have been allotted unconditionally to, or acquired unconditionally by, the public and these shares must be shown to have been beneficially held by the public throughout the previous year in so far as the present case is concerned. The "public" in sub-cl. (d) of cl. (i) does not include a director or a company to which cl. (d) does not apply.

The second condition which is required to be satisfied is that the shares must be shown to be at any time during the relevant previous year the subject of dealing in any recognised stock exchange in India or it has to be shown that the shares were freely transferable by the holder to other members of the public. With regard to this condition, there does not seem to be any finding recorded by the Tribunal and it does not appear that the question as to whether the condition in this cl. (ii) was satisfied or not was made the subject of controversy either before the tax authorities or before the Tribunal.

In addition to the two conditions referred to above, the third condition which is to be satisfied is that the affairs of the company or the shares carrying more than 50 per cent. of the total voting power were at no time during the relevant previous year controlled or held by five or less persons.

The effect of the conditions incorporated in the three clauses mentioned above is that if any one of the conditions is not satisfied, the company cannot be taken to be a company in which the public are substantially interested. With regard to this third condition, we shall deal later.

Now, so far as the condition in cl. (i) is concerned, the question as to whether shares carrying not less than 50% of the voting power have been allotted unconditionally also does not seem to have been gone into by the Tribunal. We, are, therefore, called upon to deal only with the question as to whether, on the facts of the present case, the shares carrying not less than 50% of the voting power have been acquired unconditionally by and were throughout the relevant previous year beneficially held by the public. The test to determine whether the required and the prescribed percentage of shares was acquired unconditionally by and was beneficially held by the public is now well established by the three decisions of the Supreme Court referred to above. In Raghuvanshi Mills Ltd. v. CIT [1961] 41 ITR 613, the Supreme Court was dealing with the Explanation to s. 23A of the Indian I.T. Act, 1922, the terms of which, as we have already pointed out, were similar to the provisions contained in s. 2(18)(b) of the Act except that at the time when the Supreme Court was considering the relevant provision, the percentage of shares was 25 and not 50 as in the present case. The material part of the Explanation was quoted by the Supreme Court as follows :

"Explanation.—For the purpose of this sub-section,—

a company shall be deemed to be a company in which the public are substantially interested if shares of the company ... carrying not less than twenty-five per cent. of the voting power have been allotted unconditionally to, or acquired unconditionally by, and are at the end of the previous year beneficially held by, the public.... and if any such shares have in the course of such previous year been the subject of dealings in any stock exchange... or are in fact freely transferable by the holders to other members of the public."

Dealing with the Explanation, the Supreme Court observed as follows (p. 620):

"The Explanation lays down, among the tests, the minimum interest which can be called 'substantial' by saying that shares of the company carrying not less than 25 per cent. of the voting power must be allotted unconditionally to, or acquired unconditionally by, the public and they must be beneficially held by the public. The essence of the Explanation lies not in the percentage which only shows the limit of the minimum holding by the public, but lies in the words 'unconditionally' and 'beneficially'. These words underline the fact that no person who holds a share or shares not for his own benefit but for the benefit of another and who does not exercise freely his voting power, can be said to belong to that body, which is designated 'public'. The word ' public is used in contradistinction to one or more persons who act in unison and among whom the voting power constitutes a block. If such a block exists and possesses more than seventy-five percent. of the voting power, then the company cannot be said to be one in which the public are substantially interested." (Underlining ours).

These observations of the Supreme Court will thus indicate that when the definition in s. 2(18)(b) requires that the prescribed number of shares should be beneficially held by the public, it contemplates that a person must hold the shares for his own benefit and no person who holds a share or shares not for his own benefit but for the benefit of another will fall within the body which is designated "public" in s. 2(18)(b)(i). One of the important considerations, therefore, for deciding whether a company can be said to be a company in which the public are substantially interested is whether the prescribed number of shares are held by the member concerned for his own benefit or for the benefit of another. "Beneficially holding a share" is not the same thing as "holding a share for the benefit of another "or" some other person being the beneficiary of the share", as contended for the assessee.

The Supreme Court has also pointed out that the word "public" is used in contradistinction with one or more persons who act in unison and amongst whom the voting power constitutes a block. Therefore, one of the other important considerations which has to be taken into account while applying the definition in s. 2(18)(b) is whether there are one or more persons who act in unison and amongst whom the voting power constitutes a block and only those members of the public who are outside this block will, therefore, be covered by the "public" as contemplated by s. 2(18)(b) of the Act. This is made further clear by the Supreme Court in the Jubilee Mills' case [1963] 48 ITR (SC).9. Referring to the decision in Raghuvanshi Mills' case [1961] 41 ITR 613, the Supreme Court observed as follows (p. 17)

"This court pointed out that by the words 'unconditionally' and 'beneficially' are indicated that the voting power arising from the holding of those shares should be free and not within the control of some other shareholder and the registered holder should not be a nominee of another. It was pointed out again by this court in Shree Changdeo Sugar Mills Ltd. v. Commissioner of Income-tax [1961] 41 ITR 667 (SC), that by 'unconditional' and 'beneficial' holding is meant that the shares are held by the holders for their own benefit only and without any control of another...... This court pointed out that what one has to find out is whether there is an individual who, or a group acting in concert which, controls or control the affairs of the company to the exclusion of others by reason of his or their voting power. Such person or group of persons do not answer the description 'public'."

The scope and the nature of an enquiry which is contemplated when determining whether a company is a company in which the public are substantially interested were, laid down by the Supreme Court in CIT v. East Coast Commercial Co. Ltd. [1967] 63 ITR 449. Dealing with the provisions of s. 23A(1) of the Indian I.T. Act, 1922, it was observed as follows (p.455).

“It is clear that in deciding whether an order under section 23A(1) is called for, the Income-tax Officer must determine—(i) whether there is an individual or a group which can control the voting power as a block. The existence of such a block may be established by showing that the voting power is vested in person possessing more than fifty per cent. of the shares issued who act in concert; and (ii) that the block exercises a controlling interest over tree affairs of the company. This condition is satisfied only if the voting power of the block or group is seventy five per cent. or more. If the block holds seventy-five per cent, of the voting power, it shall be deemed that the company is one in which the public are not substantially interested. On the other hand, if the members of the public hold shares of the company (not being shares entitled to a fixed rate of dividend, whether with or without a further right to participate in profits), carrying not less than twenty-five per cent, of the voting power allotted unconditionally to, or acquired unconditionally by, them, the company the shell be deemed to be one in which the public are substantially interested."

These observations were made, in the context of the explanation to s. 23A(1) which than prescribed 25% of the voting power as the required percentage of being allotted unconditionally to, or acquired unconditionally by, and beneficially held by the public. The supreme Court also reiterated the view taken in the Jubilee Mills’ case [1963] 48 ITR (SC) 9 and the Raghuvanshi Mills’ case [1961] 41 ITR 613 (SC), that no direct evidence of overt act or concert between the members of the group having control over voting was necessary to prove that the company was not one in which the public were substantially interested and that in deciding whether there is such a controlling interest, there is no formula applicable to all cases. In the Jubilee Mills’ case, the Supreme Court had observed as follows (p. 20):

"The test is not whether they have actually acted in concert but whether the circumstances are such that human experience tells us that it can safely be taken that they must be acting together. It is not necessary to stake the kind of evidence that will prove such concerted actings. Each case must necessarily be decided on its own facts."

It is not necessary to multiply authorities and cite decisions of this court which dealt with similar questions because they followed the decisions of the Supreme Court, but we will merely mention that similar questions fell for consideration in Indian Hume Pipe Co. Ltd. v. CIT [1969] 74 ITR 762 (Bom.), and Seksaria Biswan Sugar Factory Ltd. v. CIT [1975] 101 ITR 705 (Bom.).

Now, the arguments before the Tribunal in the instant case had proceeded on the footing that 81% of the shares held by the three public trusts must be treated as being held by the public. As indicated by the decisions referred to above, two questions will have to be answered. Firstly, whether there is any group of shareholders who can be considered as a block and whose voting power is more than 50% and, secondly, are 50% of the shares acquired unconditionally and beneficially held by the public. As a matter of fact, any view which we may take on the argument which is advanced before us at considerable length on behalf of the assessee that the shares held by the trustees must be treated as shares held by the public, would be sufficient to answer the question referred to us in this reference. We have repeatedly tried to ascertain from Mr. Vyas as to whether the shares held by the three trusts, which between themselves hold about 81% of the shares and they are undoubtedly a group of Tata Charities, can be said to have been beneficially held by any particular person and we have been repeatedly told that public in general, who are the beneficiaries under the trusts, are the beneficial holders of these shares. This runs counter to the decisions of the Supreme Court. As already pointed out, if a person does not hold a share for his own benefit, that person must fall out of the category of "public", as contemplated by the definition in s. 2(18) of the Act. Admittedly, the shares are held by the trustees in their own names, but they are admittedly not the beneficial holders of the shares. If the shares are not held by the trustees for their own benefit and they are held for the benefit of somebody else, on the law laid down by the Supreme Court, they must be out of the category of "public". The total number of shares held by these three trusts comes to about 81%. This by itself will rule out any possibility of the prescribed 50% of the shares being held by the public.

The shares are also not acquired by the beneficiaries. The shares are acquired by the trustees for the beneficiaries. The conclusion appears to us to be inescapable that the 81% of shares which are held by the trustees for the beneficiaries under the public trusts cannot be said to be shares held by the public. Even so far as the controlling interest is concerned, it is difficult to resist the conclusion that the three public trusts hold a controlling interest in the company. No doubt, some of the trustees in the three trusts are different. But so far as the Lady Tata Memorial Trust and Sir D. J. Tata Trust are concerned, three trustees are common and the first trust has 1,400 shares and the second trust has 2,995 shares. As a matter of fact in all the three trusts, the first name of the trustee, which would normally be the name first recorded as the holder of the shares, is the same, namely. Lady Navajbai Ratan Tata. Normally, these trustees would be expected to act in concert. Similarly, the remaining shares are held either by Tata Sons Pvt. Ltd. to the extent of 1,051, that is, 17.5% exclusively or by Tata Sons Pvt. Ltd. jointly with another person and there are 8 such groups of 6 shares each, out of which the joint holders in 4 groups are trustees in one or the other trust. Looking at the manner in which the shares are held, either way, therefore, it appears to us to be clear that the prescribed 50% of the shares, as required by cl. (i) of s. 2(18)(b), cannot be said to be held by the public. If this condition is not satisfied, then irrespective of the question as to whether the second or the third condition is satisfied or not, the company will not be one which falls within s. 2(18)(b) of the Act.

It is no doubt true that Mr. Vyas has contended that whether the third condition with regard to the affairs of the company or the shares carrying more than 50% of its total voting power being at no time, during the relevant previous year, controlled or held by five or less persons, is fulfilled or not is a matter on which no finding has been recorded. But the argument before the Tribunal itself seems to have proceeded on the fact that more than 50% of the shares are concentrated in the hands of the three trusts. All the joint trustees will have to be treated as a single unit for the purposes of the control and since the three trusts control 81% of the shares, in our view, even the third condition is not satisfied. Looking at the matter either way, therefore, it is difficult for us to uphold the view of the Tribunal that the assessee-company is a company in which the public are substantially interested.

Accordingly, the question-referred is answered in the negative and in favour of the Revenue. The assessee to pay the costs of this reference.

[1981] 51 COMP. CAS. 375 (DELHI)

HIGH COURT OF DELHI

New Bank of India Ltd.

v.

Union of India

S. RANGANATHAN AND D.R. KHANNA, JJ.

C.W.P. Nos. 665 and 787 of 1978.

FEBRUARY 27, 1980

G.L. Sanghi and C.L. Chopra for the Petitioner.

B.N. Lokur, K.L. Sharma and K.N. Kataria for the Respondent.

JUDGMENT

D.R. Khanna, J.—These two writ petitions bearing Nos. 665 and 787 of 1978, raise certain common questions of fact and law and are, therefore, being taken together.

Briefly stated, the controversy pertains to whether the transfer of shares which a debtor, on obtaining a loan from a bank, effects in the latter's favour in the course of extending security results in the creation of a trust and, therefore, necessitates the registration of trust with the Public Trustee in terms of s. 153B of the Companies Act.

Writ Petition No. 665 of 1978 has been brought by the New Bank of India Ltd. The respondents impleaded are the Union of India and the Public Trustee to the Government of India, Department of Company Affairs. It is averred that the petitioner-bank in the normal course of its banking business is having a large number of cash credit accounts against the security of shares, etc. One such account is being maintained by the Universal Investment Private Ltd. from December 12, 1968, at the bank's office in K-Block, Connaught Circus, New Delhi. The credit limit permissible in this account is up to Rs. 4,50,000. That concern has, apart from executing a pronote in favour of the bank for Rs. 4,50,000 as collateral security, handed over to the bank 67,600 shares of Rs. 10 each held by it in the Jaipur Udyog Ltd. and given blank transfer deeds as security towards the payment of the amount. A further agreement for cash credit account was executed by this concern on August 20, 1971, and the shares were pledged in favour of the bank. In terms thereof the bank was given full authority either to sell the shares or to get them transferred in its favour. The bank accordingly got those shares transferred in its name. This was also in accordance with the general practice of the bank when the amounts of loans exceeded Rs. 50,000.

It has further been averred that on 3rd November, 1976, the petitioner-bank received a letter from the Public Trustee requiring it to file a declaration (as per form enclosed) under s. 153B of the Companies Act. The bank, however, did not do so and rather contested the propriety of the notice on the ground that it was not a trustee but a mere pledgee, holding the shares as security towards realisations of the amount advanced which stood at over Rs. 7,90,000 on June 1, 1978. No instrument of trust in writing whatsoever was said to have been executed and this circumstance by itself, it was stated, excluded the application of s. 153B. However, in spite of this clarification given to the Public Trustee as also the clear provisions of law, the Public Trustee is insisting that the bank should abide by the provisions of s. 153B. This writ petition has, therefore, been filed seeking relief in the nature of a writ of certiorari and mandamus to the effect that the respondents should not proceed against the bank for the alleged contravention of the provisions of s. 153B of the Companies Act.

From the side of the respondents, a counter has been filed by Shri M.K. Kukreja, Public Trustee. In this, it has been stated that the transfer of the shares in favour of the bank as collateral security for the cash credit account did not create any beneficial interest in those shares in favour of the bank, and instead the same continued to be retained by the Universal Investment Trust Ltd. In this way, a trust was stated to have been created and the bank was estopped from disputing its legal character. It has further been urged that it would be necessary and proper to examine the true nature of the transaction, having regard to all the terms and conditions of the various documents. It has been denied that the bank is only a pledgee. Rather the ownership of the shares, it is pointed out, has been transferred in favour of the bank while the beneficial interest is still retained by the Universal Investment Trust Ltd., and thus a trust has come into being. It has also been denied that no instrument in writing creating the trust has been executed. The agreements and documents executed between the parties, it is pleaded, constituted the instruments in writing.

In the other Writ Petition No. 787 of 1978, the petitioner No. 1 is the Sutlej Cotton Mills Ltd. (hereinafter called "the Sutlej Cotton") and the petitioner No. 2 is the Gwalior Rayon Silk Manufacturing (Weaving) Company Ltd. (hereinafter called "the Gwalior Rayon"). The respondents impleaded are the Union of India, the Public Trustee and the Punjab National Bank, Bhawani Mandi. The facts enumerated are that the Sutlej Cotton pledged and/or deposited 1,46,000 equity shares of Rs. 10 each which it held in Gwalior Rayon with the Punjab National Bank, Bhawani Mandi, as collateral security, in consideration of the bank agreeing to stand guarantee for the machinery purchased by Sutlej Cotton's unit known as "Rajasthan Textile Mills" on deferred payment terms. Those shares were subsequently got registered with the Gwalior Rayon in the name of the bank during the period from February 24, 1975, to January 21, 1977. By this pledging and/or deposit of shares, a mere charge was created over the shares in favour of the bank which held them as a bailee for the specific purpose. A resolution of the board of directors of the Sutlej Cotton was passed on June 25, 1974, giving out the circumstances in which the shares were pledged and certain letters were also exchanged with the bank. The entire transaction, it has been claimed, in reality and in substance, amounted to a pledge and/or pawning within the meaning of s. 172 and other provisions contained in the Indian Contract Act.

It has further been stated in the petition that the Public Trustee has required the Punjab National Bank to file a declaration as trustee of those shares in terms of s. 153B of the Companies Act. Similarly, the Gwalior Rayon has been required to send all papers, notices, etc., concerning those shares to the Public Trustee. The Sutlej Cotton then refuted that any such trust had been created and instead pleaded that the bank's status was that of a pledgee. The notices were, therefore, required to be withdrawn. The Public Trustee, however, insisted in his designs and claimed to possess certain legal opinion from the Ministry of Law. That legal opinion, however, was not made available to the petitioners.

It has, therefore, been contended that the transaction between the Sutlej Cotton and the Punjab National Bank was a contract of bailment simpliciter, whereunder shares had been merely pledged and/or pawned as security, and no trust whatsoever had been in any manner created. Sections 153B and 187B of the Companies Act are, therefore, pleaded to be not applicable as they can be invoked only where a trust within the meaning of s. 3 of the Indian Trusts Act, 1882, had been created. A bailee, it is urged, cannot be termed as a trustee. The present writ has, therefore, been moved alleging that in case the petitioners did not comply with the demands of the Public Trustee, they were in all likelihood to suffer irreparable harm in the form of penalties, etc. Relief in the nature of mandamus, prohibition and certiorari has been sought.

From the side of the Public Trustee, a counter has been filed in which similar assertions have been made as already mentioned in the narration of facts of the other writ. The locus standi of Sutlej Cotton to move this writ has also been challenged. Rather, the notices and letters of the Public Trustee were stated to be all addressed to Gwalior Rayon by the Punjab National Bank. It is reiterated that the bank has become a trustee of the shares within the meaning of the expression under s. 153B of the Companies Act, particularly when the shares stand transferred in its favour. Trusts, it is pleaded, are of various kinds and included constructive trusts also. The expressions "trust" and "trustee" appearing in s. 153B, it has been urged, are used in a general sense and not in the technical sense given to them by s. 3 of the Indian Trusts Act. The beneficial interest in those shares, it is pointed out, still vests in the Sutlej Cotton.

Various documents have been filed from the side of the petitioners. One of them dated April 3, 1974, is addressed by the Punjab National Bank to the Rajasthan Textile Mills Unit of the Sutlej Cotton in which it was intimated that the bank had extended deferred payment guarantees for an amount of Rs. 36.50 lakhs. The securities required from the Rajasthan Textile Mills were the counter-indemnity and the pledge of shares of Gwalior Rayon to the extent of 125% of the guarantee amount. The charge was to be got registered with the Registrar of Joint Stock Companies and the shares also transferred in the name of the bank as per rules.

Another document shows that the Punjab National Bank in compliance with the notice of the Public Trustee submitted the required declaration under s. 153B of the Companies Act with the Public Trustee in which it was mentioned that shares of the face value of 14.60 lakhs of the Gwalior Rayon were lying transferred to it as collateral security against D.P.G. and term loan. The beneficiary was stated to be the Sutlej Cotton. In a note written under this declaration it was, however, mentioned that the shares were held as a pawnee and not as a trustee. Copies of documents under which the shares were held were enclosed.

The copy of the resolution dated June 25, 1974, of the board of directors of the Sutlej Cotton, about which reference has been made above, stated that capital expenditure of Rs. 58,00,000, inter alia, for modernization of the company's textile mills at Bhawani was to be incurred. Some of the machineries were also to be purchased on deferred payment terms and for this purpose the company had approached the Punjab National Bank for sanction of a deferred payment guarantee limit of Rs. 30.50 lakhs. The bank had agreed to the same. The pledging of all the shares held by the company in the Gwalior Rayon with the bank was, therefore, authorised to the extent of 125% of the guarantee amount as security.

Another document filed is a circular issued by the Punjab National Bank, head office, to all its branches in which reference has been made to a directive issued by the Reserve Bank of India dated August 28, 1970, regarding advances against shares. It is enjoined therein that where credit facilities of over Rs. 50,000 on the security of shares are extended, the shares must be transferred in the name of the bank, and the bank shall have exclusive voting rights in respect thereof. It contains specific prohibition against the advance of credits. Where such voting rights are not so transferred to the bank, those voting rights, it is further provided, have to be exercised with the prior approval of the Reserve Bank of India and in accordance with such directions as may be given by the Reserve Bank of India.

In this case also, the Sutlej Cotton executed a pronote in favour of the bank for an amount of Rs. 65,00,000. Another document dated January 12, 1973, brought out the terms and conditions of the cash credit account (fresh) mentioning the overdraft facility of Rs. 65,00,000. There is a narration in it of the deferred payment guarantee and of the counter-indemnity from the company and the pledge of shares. In another letter, the name of the company in which the shares were held, namely, the Gwalior Rayon, was elaborated and an hypothecation agreement was also executed on September 3, 1973. While forwarding the shares to the bank, the Sutlej Cotton in its letter dated August 8, 1973, mentioned that they were being sent as security for issuing the deferred payment guarantee. The bank, however, informed in writing that the shares be transferred in its favour. This was done accordingly.

During the course of the hearing of this writ moved by the Sutlej Cotton and the Gwalior Rayon, it was found that the Punjab National Bank had not made any appearance. The other respondents, therefore, sought that the bank should be required to produce the documents which the Sutlej Cotton might have executed while obtaining credit and the transfer of shares. Directions were, therefore, issued to the bank to file those documents. Some documents were thereafter filed along with an affidavit to the effect that, apart from them, no other document existed in the possession of the bank. It thus appears that no formal document was executed between the bank and the Sutlej Cotton about the pledging of the shares.

Section 153B of the Companies Act, 1956, under which the Public Trustee has required the two banks to file declarations, is to the following effect:

"153B. (1) Notwithstanding anything contained in section 153, where any shares in, or debentures of, a company are held in trust by any person (hereinafter referred to as the trustee), the trustee shall, within such time and in such form as may be prescribed, make a declaration to the public trustee.

(2) A copy of the declaration made under sub-section (1) shall be sent by the trustee to the company concerned, within twenty-one days, after the declaration has been sent to the Public Trustee.

(3) (a) If a trustee fails to make a declaration as required by this section, he shall be punishable with fine which may extend to five thousand rupees and in the case of a continuing failure, with a further fine which may extend to one hundred rupees for every day during which the failure continues.

(b) If a trustee makes in a declaration aforesaid any statement which is false and which he knows or believes to be false or does not believe to be true, he shall be punishable with imprisonment for a term which may extend to two years and also with fine.

(4) The provisions of this section and section 187B shall not apply in relation to a trust—

(a) where the trust is not created by an instrument in writting;

(b) even if the trust is created by an instrument in writing, where the value of the shares in, or debentures of, a company, held in trust—

(i) does not exceed one lakh of rupees; or

(ii) exceeds one lakh of rupees but does not exceed either five lakhs of rupees or twenty-five per cent. of the paid-up share capital of the company, whichever is less.

Explanation.—The expression 'the value of the shares in, or debentures of, a company' in clause (b) means,—

(i) in the case of shares or debentures acquired by way of allotment or transfer for consideration, the cost of acquisition thereof, and

(ii) in any other case, the paid-up value of the shares or debentures".

These provisions thus show that the shares must be held in trust and that such trust must have been created by an instrument in writing. Of course, the value of the shares must exceed rupees one lakh. The consequence of the trustee not filing the declaration invites penalty of Rs. 5,000 and in the case of continuing failure, a further fine which may extend to Rs. 100 for every day's default.

Section 187B further enjoins that the rights and powers (including the right to vote by proxy) exercisable at any meeting of the company, etc., cease to vest in the trustee but become exercisable by the Public Trustee. The latter is empowered to attend the meetings and exercise these rights and powers himself or require the trustee to do so under his directions. The Public Trustee, however, may abstain from exercising these rights and powers, if in his opinion the object of the trust or the interest of the beneficiaries of the trust are not likely to be adversely affected by such abstention. The trustee on his part may advise the Public Trustee but it is left to the latter's discretion to accept or reject the same. The Public Trustee is also conferred the rights and powers to receive and inspect all books and papers which a member is entitled to receive and inspect.

Section 187C makes provision for the filing of declarations with the companies concerned by the holders of shares who do not hold the beneficial interest in such shares. Similar requirement is enjoined on the holders of beneficial interests also. On their failure to file such declarations without any reasonable excuse, they can be burdened with a fine of Rs. 1,000 per day during which the failure continues. Sub-section (6) of the same section is to the following effect:

"Any charge, promissory note or any other collateral agreement, created, executed or entered into in relation to any share, by the ostensible owner thereof, or any hypothecation by the ostensible owner of any share, in respect of which a declaration is required to be made under the foregoing provisions of this section, but not so declared, shall not be enforceable by the beneficial owner or any person claiming through him".

Section 153, to which reference is made in s. 153B, lays down that no notice of trust, express, implied or constructive, shall be entered on the register of members or of debenture-holders. Thus, it purports to include obligations in the nature of a trust as enumerated in Chap. IX of the Indian Trusts Act, 1882.

However, s. 153B when it makes mention of trusts, does not elaborate the inclusion of implied or constructive trusts, or what may be termed as obligations in the nature of trust. The circumstance that sub-s. (4) enjoins the creation of a trust by an instrument in writing before this section can come into play further tends to exclude implied or constructive trusts or obligations in the nature of a trust. One has, therefore, to look to the definition of trust as given in s. 3 of the Indian Trusts Act for understanding the import of this expression under s. 153B. The same envisages that a "trust" is an obligation annexed to the ownership of property, and arising out of confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.

The Bombay High Court has thus in the case of Tan Bug Taim v. Collector of Bombay, AIR 1946 Bom 216, observed that the very heading of Chap. IX and the terms of s. 80 of the Indian Trusts Act show that the relationships provided for in Chap. IX are not trusts but obligations in the nature of trusts and, therefore, it cannot be said that merely because those obligations were enacted within the provisions of that Act, they were included in the definition or conception of trusts which only were the subject-matter of the enactment of that Act.

The Patna High Court has also held in the case of Nandkishore Bajoria v. Gaya Sugar Mills Ltd., AIR 1953 Patna 390, that s. 185 of the Indian Companies Act, 1913, was confined to trusts as defined in s. 3 of the Trusts Act. Distinction was drawn between an express trust and a constructive trust. The later category was opined as not covered by the provisions of s. 185 of the Indian Companies Act, 1913.

From the side of the Public Trustee, it has been contended that the word "trust" as used in s. 153B has not to be understood in the legal concept as envisaged by the Indian Trusts Act, but has to be given the common parlance meaning of faith or confidence reposed. The same was claimed as analogous to trust or confidence or tacit belief which one may have in another.

In our opinion, however, when certain terms have become words of well-recognised legal import, they have to be understood as such when found introduced in any statute, unless they are denned otherwise or are stated in a different context. There is, therefore, no reason to ascribe a different meaning to the word "trust" occurring in s. 153B of the Companies Act from what has come to be understood in the context of the Indian Trusts Act. The Punjab High Court has, in the case of S. Ripudaman v. Surinder Kumar, AIR 1959 Punj 92, taken note of the implication of a trust under that Act and observed that it subjected the person, by whom a property was held, to equitable duties to deal with the property for the benefit of another, and in the case of an express trust arising from the intention of a person to create a trust directly or indirectly, it was the manifestation of intention and not the actual intention which determined whether a trust had been created. A number of features, it was next held, distinguished a trust from a contract. Trust always involved an equitable ownership whereas a contract was a legal obligation based on an undertaking supported by a consideration, which obligation may or may not be fiduciary in character. The beneficiary of a trust had the beneficial interest in the trust property, the beneficiary of a contract had only a personal claim against the promisor.

In the present cases, no formal instruments of trust stand executed as envisaged by sub-s. (4) of s. 153B of the Companies Act, 1956. However, this circumstance should not preclude the ascertainment whether the creation of trusts could be deduced from a number of documents executed between the concerned parties.

Before proceeding further, it may be relevant here to mention what was the object which induced the Legislature to introduce the provisions contained in ss. 153B, 187A and 187B. A perusal, in this respect, of the Guide to the Companies Act, by A. Ramaiya (8th Edn., 1977), at p. 329, shows that the Finance Minister, while elaborating the object and scope of these sections at various stages of the Bill, explained that while the Government had no intention to interfere with the position of trust equities, it had often happened that certain types of trusts held large amounts of equities and the people who were in management of these trusts used those equities for the purpose of having control. Such groups of persons, it had been noted, were defeating the various other provisions which tended to limit the amount of control by excessive acquisition of equity capital in their hands by holding them in the form of trust and then becoming trustees themselves. The result was that trust funds were being invested and utilised for furthering the donor's business interests than of the beneficiaries. The intention of these provisions was, therefore, not to interfere in the affairs of genuine trusts but to prevent the holding of securities by trusts to be used by a group of persons for the purpose of augmenting their own voting rights. A public trustee was, therefore, sought to be appointed to whom the exercise of voting rights was to be transferred.

We next advert to the facts of the present cases as to what in substance were the nature of loan accounts and whether the transfer of shares in the form of extending securities in favour of the banks did result in the creation of trusts as envisaged by s. 153B of the Companies Act. Ex facie, three factors were already discernible. Firstly, though the shares stood transferred in the names of the banks, the dividends accrued on them were credited to the respective cash credit accounts of the debtors. Thus, the benefit of those dividends was accruing to them. There was further an obligation to transfer back the shares to the debtors once the accounts were squared up. Thirdly, according to the Public Trustee, the voting rights were also being exercised by the banks at the behest of the debtors. In this way, the main ingredients of trusts were pointed out to be clearly made out. The present, it is stated, are cases of trust oriented pledges, and not pledge-oriented trusts. In the former case, it has been pleaded, it did not make much difference if some element of pledge also co-existed. A pledge, it is pointed out, normally does not require transfer of ownership. The existence of such transfers, in the present cases, thus is a pointer to the creation of trusts and that the banks are holding the shares for the benefit of the original holders.

From the side of the petitioners, however, it has been urged that the creation of a trust is primarily a matter of intention and overt act of the concerned parties. In the present cases both the debtors and the banks have not claimed that any trusts have come into being. They make no secret that the transfers of shares were in the course of extending securities for the loans. None had thus the intention to create trusts and, therefore, the Public Trustee is not justified to thrust such trusts on them.

In our considered opinion, it is the entire course of conduct and dealings which must be kept in view. One cannot be oblivious that there can be cases where the legal effect of such course of dealings may, in fact, result in the creation of trusts though the parties may not have envisaged so. There should be no reason not to give effect to such trusts if they otherwise satisfy the ingredients of a legal trust. Thus, the Bombay High Court in the case of Fazalbhai Mills Ltd. (In liquidation), In re [1936] 6 Comp Cas 351; AIR 1936 Bom 296, observed that fiduciary relationship may be established without the use of the word "trust". A person may become a trustee by his own acts and conduct so as to deprive himself of all beneficial ownership of a property and declare that he will hold the same in trust for another. The mere fact that the owner retains an interest in the property would not necessarily go against the foundation of a trust.

However, the significant factor, which pervades the entire course of dealings is that the transfers of shares in favour of the banks were effected primarily for the purpose of providing securities to the loan accounts. It was not within the purview of the parties, nor was it intended that thereby they were creating any trusts. This is amply reflected from the circumstance how they have vigorously contested in these writs the creation of any such trusts. In fact, these transfers seem to have resulted from the directives of the Reserve Bank of India to which reference had already been made above. The real object behind them continued to be to obtain absolute safeguard for the loans advanced. Perhaps it could as well be said that the necessity for these transfers was dictated by the desire to secure fully the interest of the bank lest any surreptitious disposing of those shares by the debtors in any manner took place.

The present are not cases of the nature where trusts are created to enable individuals to derive personal advantages by way of control over companies to curb which s. 153B was introduced in the Companies Act. Rather the banks have obtained transfers of shares for protection of their own interest and for their benefit. This does not appear compatible with the creation of a trust as in that case the beneficiary should be a third party or such party and the owner. Furthermore, a trustee is generally not entitled to dispose of or appropriate the trust property for his benefit. In the present cases, however, the rights of the banks to appropriate the shares to their benefit or dispose them of and utilise the amounts thereof for adjustment of the loan amounts due to them, in case the debtors do not discharge them, remain. The obligation requiring the transfer of shares back to the debtors can only arise where the debtors clear their dues to the banks on the basis of those loans. All these thus plainly show that the retention of shares by the banks during the subsistence of the loans is for the protection of their own interest.

In so far as the credit of the dividend amounts received by the banks in the cash credit accounts of the debtors, it would, no doubt, seemingly appear that the beneficial interest in those dividends remains with the debtors. However, a careful scrutiny would bring out that this is what superficially seems to be so. In reality, the banks are partly recovering the amounts of the loans advanced by them by appropriating the dividends towards the amounts due to them.

We are further of the opinion that there appears no basis for the Public Trustee to assume that the voting rights are retained by the debtors even after the transfer of the shares to the banks. The Reserve Bank directive in this regard makes the matter sufficiently clear. It is enjoined that those voting rights are exercisable by the banks only, and that too under the directions of the Reserve Bank. Thus, an equally independent body keeps supervision and control over the exercise of those voting rights which can rule out any connivance of misfeasance. There is nothing to assume that the banks have any ulterior objects to enter into collusions to enable individuals to derive personal gains or to unwarrantedly abdicate their voting powers incidental to the transfer of shares in their favour, which the Reserve Bank has so specifically required to be retained. The Reserve Bank plays as good a role as a watch dog in this respect as the Public Trustee could, and in case of any default, the Public Trustee may in his advisory capacity guide the Reserve Bank.

We are, therefore, of the considered opinion that in the circumstances of the present cases, it could not be said that any trusts were created when the banks got the shares in dispute transferred in their favour as a sort of security for the loan amounts advanced by them.

As regards the locus standi of the Gwalior Rayon to move the writ, it was clearly there, as it would have suffered penalties in case it did not serve notices and other documents on the Public Trustee. The Sutlej Cotton, however, it seems has no right over the shares as long as they stand transferred in favour of the bank and the loan amount is not discharged. However, it cannot here also be ignored that the transfer of these shares was in the context of extending security to the loan and the company has a right to obtain back their transfer as and when the loan is discharged.

The result, therefore, is that we allow these writs to the extent that the notices issued by the Public Trustee to the petitioners and the Punjab National Bank are quashed, and the Public Trustee is restrained from proceeding against the petitioners for any violation of those notices. Looking at the circumstances, we make no order as to costs.

Ranganathan J.—I agree. I think that in interpreting s. 153B one should give due weight to the very careful language used in it, particularly when considered in contrast with that employed in s. 153 and s. 187C. Section 153 is very widely worded and embraces within its sweep all types of trusts, express, implied or constructive. Section 187C, again, though somewhat akin to s. 153B, has a wide application and seeks disclosure of all types of beneficial interest in shares; in particular, sub-s. (6) thereof covers, by specific mention, charges, hypothecation and all types of agreements "created, executed or entered into" in relation to any share. Section 153B, on the other hand, is narrow in scope and takes in only cases where shares are held by a person under a trust created by an instrument in writing. The decisions referred to by my learned brother show that the expression, "trust", used in similar contexts, has been held applicable only to express trusts and as not appropriate to comprehend obligations in the nature of trusts or constructive trusts. Having regard to these considerations, I think that s. 187B is attracted only where one or more documents expressly create or constitute a trust in the full sense of s. 3 of the Trusts Act where a person transfers property to another with certain obligations annexed thereto as a result of confidence reposed by him in that other and declared and accepted by the other and not merely where some sort of fiduciary obligations can be spelt out from several documents executed by and between the parties.

[1996] 85 COMP. CAS. 625 (AP)

HIGH COURT OF ANDHRA PRADESH

Anam Premkumar Reddy

v.

India Fruits Ltd.

T.N.C. RANGARAJAN, J.

COMPANY PETITION NO. 22 OF 1991

SEPTEMBER 2, 1995

P. Ramachandra Reddy, for the Petitioners.

K. Srinivasa Murthy, for the Respondents.

JUDGMENT

T.N.C. Rangarajan, J.—This is a petition under section 155 of the Companies Act, 1956.

According to the petition, the first petitioner is the son of the third respondent, and the other petitioners are the wife and children of the first petitioner. They are shareholders in the first respondent-company and the second respondent-company. The fourth respondent is the wife of the third respondent. The fifth respondent is the family trust set up by the third respondent. The first respondent-company had been functioning practically as a family concern, and in 1960 it set up a unit for manufacture of electrical conductors as a division under the name Anam Electrical Manufacturing Company which later became the second respondent-company. Another partnership firm called Godavari Electrical Conductors was set up and it purchased 4,436 out of 5,450 equity shares in the first respondent-company utilising a sum of Rs. 1.55 crores taken from the second respondent. The said loan was being repaid with the dividends earned on the shares with the result that in 1988 the outstanding principal was only Rs. 10.09 lakhs and unpaid interest amounted to over Rs. 1.30 crores. On October 21, 1982, the third respondent executed a trust-deed with an initial fund of Rs. 1,116 reciting as the object, the maintenance of a controlling interest in the company by holding more than 66 per cent. of the equity shares and to provide reasonable income for life for the members of the family. It was declared to be a private non-discretionary and irrevocable trust. The beneficiaries under the trust were a charitable trust known as A.V. Reddy Charitable Trust—15 per cent., with the other beneficiaries as Smt. A. Saraswathy, the fourth respondent 12½ per cent.; the first petitioner 20 per cent.; the second and third petitioners 5 per cent. each; the fourth, fifth and sixth petitioners 12½ per cent. each; and the seventh petitioner 5 per cent. in respect of whom only the share of the distributed income had to be given during their life time and after their life, the share of each person has to be divided equally among his heirs in the male line and in their absence among his heirs in the female line in respect of sons only while in respect of the wife and daughters of A. Premkumar Reddy their shares after their life will accrue to the corpus of the trust. Some of the petitioners had moved a Company Petition No. 42 of 1990, feeling oppressed by the conduct of the third and fourth respondents who are in management, and a compromise was effected on November 19, 1990, whereupon two of the petitioners amongst petitioners Nos. 4 to 6 were taken into the board of the company and, accordingly, that company petition was withdrawn. Subsequently, a deed of extinguishment of the trust was registered by the third respondent on February 25, 1991, and in the register of members of the company the entry relating to the shares held by the trust was changed to indicate that the shares were held by the third respondent in his individual status and not as a trustee. According to the petition, the change effected in the register of members was invalid as the trust continued to exist without extinguishment and hence the petition originally prayed for declaration that the fifth respondent-trust is a valid and legal owner of the shares or in the alternative to declare that 4,436 shares belong to the partnership firm Godavari Electrical Conductors and its partners. Subsequently, the petition was amended with the permission of the court to pray for rectification of the entries newly made in folios 38 and 39 of the register of members and to declare that the original entries remain intact. The earlier prayers have been given up.

In the counter-affidavit filed on behalf of the first respondent, the third respondent stated that the application was not maintainable; that the earlier application under section 397 filed on the apprehension that he is likely to transfer the shareholding of the company as the trustee, having been withdrawn, the same matter could not be agitated in a fresh petition; and that the petitioners had no locus standi to. maintain the petition because the shares do not stand in their names and could not be transferred in their names. It is also stated that the matter was entirely a family dispute for control of the company which could not be agitated in the form of a rectification petition. The further pleading is that the conflicting issues of fact had to be gone into by recording voluminous evidence and it should be done in an appropriate suit in the civil court and not in summary proceedings under section 155. According to the respondent, a 100 per cent. subsidiary company called, Anam Machinery Fabricators Limited with an authorised capital of Rs. 2 crores and paid up capital of Rs. 1.5 crores was established in February, 1978, by which a substantial portion of cash of the first respondent passed to the second respondent which in turn gave a loan to the partnership firm Godavari Electrical Conductors with which it purchased 4,436 shares of India Fruits Limited at the rate of Rs. 3,450 per shares totalling to Rs. 1.53 crores. Thereafter, the firm pledged the shares with the second respondent as security for the loan which carried interest of 18 per cent. Between 1978 and 1983, Rs. 1.20 crores were repaid and adjusted against the capital account. The third respondent states that he executed a trust deed on October 21, 1982, with an initial fund of Rs. 1,116 and purchased 4,436 shares from Godavari Electrical Conductors at Rs. 3,169 per share in respect of which the trust had to pay to the Godavari Electrical Conductors, Rs. 1.40 crores. Since the firm was already indebted to the second respondent, the equivalent liability was taken over by the trust. Subsequently, on February 25, 1,991, he executed a registered deed of extinguishment of the family trust for the reason that in the income-tax proceedings the purchase of the shares with the corresponding liability was not accepted and a huge tax liability was levied and the price of the shares went down to Rs. 2,053 per share on yield basis with the result that the capital value of the shares was exceeded by the liability and it became impossible to perform the objects of the trust. Accordingly, the shares were registered in the name of the third respondent as an individual by transmission. The respondent states that the entry in the register was therefore correct and the petition under section 155 does not survive. The fourth and fifth respondents have also filed counter-affidavits in support of this stand. The petitioner filed a reply-affidavit disputing all the statements in the counter-affidavit. The third respondent again filed a rejoinder.

Oral evidence was also adduced by both the sides, most of it relating to the motivation of either side and the genesis of the family disputes and mutual hostilities. The following issues were framed:

(1) Whether the petition filed under section 155 of the Companies Act is maintainable?

(2) Whether the claim that the petitioner is owner of shares con sequent to the extinguishment of the trust declared by Mr. A.V. Reddy can be enquired into and a declaration granted in a petition under section 155 of the Companies Act, 1956?

(3) Whether the trust declared by Mr. A.V. Reddy was extinguished and the consequences thereof?

(4) Whether the rectification can be granted as prayed for?

Issue No. 1.— Learned counsel for the respondents raised a preliminary objection that this petition is not maintainable as it does not fall within the scope of section 155 of the Companies Act, 1956. The three main objections taken were that the section refers only to the rectification of the name of any person and since the petition does not deal with the name of the shareholder which is recorded as Anam Venkat Reddy, no order can be passed under this section. Secondly, that the section provides for a decision on any question relating to the title of the person who wants to have his name entered or omitted from the register, and since the application does not seek such prayer it is not maintainable. Thirdly, that no notice of any trust can be entered in the register of members under section 153 and, therefore, notice of such trust entered under section 187C cannot be regarded as part of the register of share members amenable to rectification. It is also argued that the section itself was meant for recording or removing the names of shareholders who acquire shares by transfer and those who apply for recording devolution by transmission which was by operation of law and not by any inter-party transaction. On the other hand, learned counsel for the petitioners submitted that the section had to be construed liberally as a beneficial legislation to see that the real owner of the share finds his place in the register of members. It is also submitted that section 155 is not in the nature of summary procedure since the title to a share could be gone into just as in a suit and further, there being no review against the action of the company in erroneously recording the beneficial interests under section 187C, the power of the court under section 155 had to be invoked in this case also. Learned counsel for the petitioner also disputed the contention of learned counsel for the respondents that the earlier petition under section 397 precluded the filing of this petition by stating that this was an independent matter for which the cause of action itself arose after the withdrawal of the earlier petition. I think it is appropriate to dispose of the last objection of the respondents immediately as I agree with learned counsel for the petitioners that the cause of action for this petition itself occurred subsequent to the withdrawal of the earlier petition under section 397, since the offending entry was made after February 25, 1991, whereas the company petition was withdrawn on November 23, 1990, itself.

I may now take up the question whether section 155 can be invoked for correcting an error in the note by a declaration of trust recorded under section 187C. It has to be remembered that under section 150, every company shall keep a register of its members showing the name and address and occupation of the member, shares held by him and the date on which he was entered in the register as member and the date on which he ceased to be a member. Section 153 states that no notice of any trust, express, implied or constructive, shall be entered on the register of members or of debenture-holders. Section 153B provides that when the shares of a company are held in trust, he should make a declaration to the public trustee when the value of the shares exceed Rs. 1 lakh or 25 per cent. of the paid-up share capital, whichever is more. Moreover, section 187C provides that notwithstanding anything contained in section 150, section 153B or section 187B, if any member of the company does not hold the beneficial interests in the shares, he shall make a declaration to the company specifying the name and other particulars of the person who holds the beneficial interests in the shares Sub-section (3) provides that whenever there is a change in the beneficial interests in such shares, the beneficial owner shall, within thirty days from the date of such change, make a declaration to the company in such form and containing such particulars as may be prescribed. The failure to make a declaration is punishable as well as the failure of the company to comply with the provisions of the section. Obviously, the question of punishment would arise only after a declaration is made and the company does not record the same. At the same time, it is clear that section 187C does not provide for any machinery for rectifying an error in the declaration made by the shareholder or in the note recorded by the company in the register of members. We may now turn to section 155, which reads as follows:

"155. Power of court to rectify register of members.—(1) If—

(a) the name of any person —

(i) is without sufficient cause, entered in the register of members of a company, or

(ii) after having been entered in the register is, without sufficient cause, omitted therefrom; or

(b) default is made, or unnecessary delay takes place, in entering on the register the fact of any person having become, or ceased to be, a member;

the person aggrieved, or any member of the company, or the company, may apply to the court for rectification of the register."

A literal reading of this section would indicate that it refers to the rectification with reference to the "name of any person" entered in the register of members of the company. The question that arises is whether the expression "the name of any person" would include also the capacity or status which has to be recorded as a note upon the member making the declaration under section 187C. Learned counsel for the respondents pleaded for a literal reading of the section on the ground that under section 153 no notice of any trust shall be entered in the register of members and, therefore, the expression "the name of any person" cannot include the notes of his capacity as a trustee. On the other hand, learned counsel for the petitioners submitted that if this section is not extended to rectification of an error in respect of the capacity of the person, then there would be no remedy in the Act for rectification of any such errors.

It is well to remember that the provision of section 187C itself was brought into the Act by the Companies (Amendment) Act, 1974 (41 of 1974), with effect from February 1, 1975, with a view to expose benami transactions. Generally speaking, the principle of section 153 was that the company should be relieved from any obligation to take notice of equitable interest in its shares as it need not be concerned with the rights of third parties in respect of the shares held by the ostensible owner. However, the Government noted that certain trusts had large holdings which are used for having control over the companies and in order to limit such control the provisions of section 153B was introduced by Act No. 53 of 1963, with effect from January 1, 1964, creating a public trustee who may exercise the voting power of the trusts. At the same time, from the point of view of the company, the declaration of equitable rights would also enure to its benefit for the purpose of requiring the person having beneficial interests to accept calls for share capital without having the liability to pay the dividend except to the ostensible owner. It is in this background we have to consider whether the note that is recorded under section 187C should be treated as part of the name in the register of members so that if there is any mistake in the note it could be rectified under section 155. In the case of Indian Chemical Products Ltd. v. State of Orissa [1966] 36 Comp Cas 592, the Supreme Court had the occasion to consider the provisions of section 38 of the Indian Companies Act, 1913, analogous to the present section 155, where the question arose whether the devolution by operation of law could also be considered as a transfer for the purpose of. rectification, and the Supreme Court observed that the jurisdiction created by the section is very beneficial and should be liberally exercised. The court stated that the directors of the company in that case on the most frivolous of objections, prevented the State of Orissa from becoming the member for the last sixteen years and hence there was no reason why the court should not grant the applicant's relief under that section. I derive inspiration from this passage to hold that the essential purpose of section 155 is to see that the register of members reflects truly and correctly the members of the company and their status with reference to the capacity as declared under section 187C so that both the rights of the company to call for the share capital as well as the rights of the persons having beneficial interests with reference to the voting power that could be exercised by the public trustee under section 187B could be protected in view of the latest amendments to the Act. Even though before these amendments came into force, the expression "the name of any person" under section 155 would have been restricted only to the name and the said expression was not amended consequentially, the other amendments by insertion of sections 153B and 187C, by necessary implication, require that the total entry in the register of members which includes recording of a note under section 187C, must form part of the name of the person as registered which falls for consideration under section 155. The argument of learned counsel for the respondents that only a person who wants to have his name entered or omitted can maintain an application, also requires to be rejected because the provisions of the sub-section relating to the question of title of a person who wants his name to be entered or omitted, cannot limit the scope of item (ii) of sub-section (a) which refers to the name of the person entered in the register, being without sufficient cause, omitted. Since any member of the company can apply for rectification and not necessarily a person whose name is omitted, the provisions of this section are not confined to the case of the applicant alone whose name is required to be added or omitted. Sub-section (3) only provides for the procedure where the issue is other than the title of the applicant and sub-section (3)(b) provides that the court may decide any question which is necessary or expedient to be decided in connection with the application for rectification. Therefore, the scope of this section is wide enough to cover the cases where a declaration of trust after having been entered in the register under section 187C is, without sufficient cause, omitted therefrom. No doubt, the section was primarily meant to resolve the disputes relating to transfer of shares and the consequent addition or omission of the name of the shareholder in the register of members. Yet, it was recognised that all the registered particulars would be amenable to rectification as otherwise the register would become as untrue as if false particulars have been registered initially (see Palmer's Company Law, volume 1, page 7024/1, para. 7.104). Therefore, even as observed by the Supreme Court in the case cited above, the scope of this section cannot be limited to such cases alone and has to be extended to the cases of any errors in the register of members so that it reflects the information required under the Act under section 150 read with section 187C, correctly.

Learned counsel for the respondent submitted that sections 187A and 187B were concerned with the voting rights and section 187C also was stated to be brought in for the purpose of recording benami transactions and hence that section should be considered to be inapplicable to the facts of this case and consequently an entry made under that section would not be amenable to rectification. I am unable to accept this contention because section 187C by itself is not confined to benami transactions and after all such transactions were also in the nature of trusts under section 82 of the Indian Trusts Act. There is also a circular of the Company Law Board (at page 1189 of the Companies Act, 13th edition of Ramaiya) clarifying that section 187C is applicable to private trusts. Counsel also argued that the proceedings under the Companies Act are considered to be of a summary nature and not of exclusive jurisdiction as held in Sree Krishna Jute Mitts v. Krishna Rao, AIR 1947 Mad 322, which was a decision binding on this court being a pre-1953 decision according to the decision in M. Subbarayudu v. State [1955] 1 An WR 150; AIR 1955 Andhra 87 [FB]. Reliance was also placed on the decision of the Full Bench of the Delhi High Court in Ammonia Supplies Corporation Private Limited v. Modern Plastic Containers Private Limited [1994] 79 Comp Cas 163 (Delhi) [FB] to contend that the question of validity of the trust must be left for being decided in a suit and cannot be gone into in these proceedings. These decisions only indicated that where there is a complicated question of fact, the company court in its discretion may refer the parties to a suit. In fact, in the Full Bench case the real question was whether the suit is barred when a summary remedy has been provided under the Companies Act. It must be remembered that section 155 itself provides for an enquiry by a company court in which a question of title as well as other incidental matters are involved. In the present case, the issues turn on the construction of sections 155 and 187C of the Companies Act and section 77 of the Indian Trusts Act and do not involve any complicated questions of fact. Even though a voluminous oral evidence was adduced, which I could not disallow as I had c6me on the scene in the, middle of the case, most of it was absolutely unnecessary for deciding the crucial issues in the case. I am, therefore, convinced that this petition is maintainable and I hold accordingly.

Issue No. 3— One of the matters, or rather the primary question on the merits which requires to be decided is whether the trust was extinguished. Section 77 of the Indian Trusts Act, 1882 states:

"77. Trust how extinguished. — A trust is extinguished,

(a) when its purpose is completely fulfilled; or

(b) when its purpose becomes unlawful; or

(c) when the fulfilment of its purpose becomes impossible by destruction of the trust property or otherwise; or

(d) when the trust, being revocable, is expressly revoked."

The contention of the respondents is that by reason of the value of the shares being less than the amount of the loan and the interest outstanding, the trust property must be considered as unavailable and, therefore, the trust had become extinguished. Learned counsel for the respondents endeavoured to show that the expression "destruction of the trust property or otherwise" in section 77 would include a case where the value of the property was so reduced that there was nothing available for maintaining the corpus of the trust. The decision in Princess Usha Trust v. CIT [1983] 144 ITR 808; [1983] Tax LR 838 referred to a case where after distributing the trust property nothing remained in the corpus so that the fulfilment of the trust had become impossible and, therefore, the trust had been extinguished. But, in a case like this where the trust property admittedly exists, but according to the respondents, the value of that property is less than the debts charged thereon, it cannot be said that the property itself has been destroyed. I am of the opinion that the word "destruction" would mean that the property has gone out of existence and hence is unavailable for distribution. The word "otherwise" would also have to be read ejusdem generis such that whatever be the process, the trust property itself is not in existence or virtually unavailable. In a case such as this where the shares do exist though may be burdened with some debt, I do not consider it possible to accept the contention that the property does not exist and thereby it could have led to a situation where the purpose of the trust becomes impossible of fulfilment. It is also necessary to consider the provisions of the trust deed which clearly indicate that the trust is non-discretionary and irrevocable. The main object of the trust appears to be to have control of the company since it is provided under clause 30 that the shares can be sold to the beneficiaries in such numbers as will not reduce the shareholding by the trust in the company below 66 per cent. and the value of the shares should be either the break-up value of the shares arrived at from the latest balance-sheet of the company or a higher value where thought fit. There is the power to alter the object of the trust by supplementary deeds, but the irrevocable and non-discretionary nature is not to be disturbed and in fact, no such amendments are pleaded. The beneficiaries are to get a share in the income whereas the legal heirs of the sons are to get a share of the corpus, and it is not in dispute that on the date when the trust was taken to have been extinguished by the deed dated February 19, 1991, the legal heirs had been born or were en ventre sa mere. Though the trust was to continue during the life time of the income beneficiaries and until the last male heir attains majority, even assuming that the trust could be determined on the date when it was taken to be extinguished, the beneficiaries existing on that date had the right under section 56 of the Indian Trusts Act, for transfer of the corpus in their names. An illustration given to section 56 says that when A transfers certain property to B and directs him to sell or invest it for the benefit of C, who is competent to contract, C may elect to take the property in its original character. In other words, the option of taking the corpus is with the beneficiary and not with the trustee. All the more so in the case of an author who ceases to have any interest in the property when he declares an irrevocable trust and cannot exercise any powers in the capacity of an author though he happens to be a trustee. Learned counsel for the respondents banked on section 83 to contend that where it is incapable of execution, the property will revert to the author. But that actually begs the question. Unless it is possible to say that the trust was incapable of execution, the author has no right to appropriate the property to himself. We go back to section 77(c) for that matter as to whether the fulfilment of the purpose became impossible. As seen from the trust deed, the purpose was to hold the majority of shares to control the company and that purpose has not in any way become diluted or impossible by reason of the outstanding liability being more than the estimated value of the shares, nor has the corpus become unavailable. I am of the opinion that it would be necessary for the trustee to liquidate the shares and demonstrate that the amount realised is less than the outstanding debts. To a pertinent question in the parol evidence, the third respondent stated that the current price will be more, but the shares were not for sale. It is also significant that while claiming that the value of the shares has become less than zero by reason of the outstanding liability, he also claims that the property has reverted to him and he is the owner of the shares, which is sufficient to indicate that the corpus of the trust existed and was not destroyed by reason of certain debts. The third respondent in his pleadings as well as parol evidence attempted to explain his action with reference to certain wealth-tax assessment. Learned counsel for the respondents submitted that in the income-tax and wealth-tax assessments, the income-tax department did not accept the declaration of the trust as genuine but ultimately the Income-tax Appellate Tribunal held that whether the trust is accepted as genuine or not, the liability should be set-off against the value with the result that there was no tax liability and that the question itself became academic. The decision of the Tribunal also became final since a reference application made by the department was rejected by the High Court. Reliance was also placed on the value of the shares mentioned in these assessments to indicate that if that value was taken, the outstanding loan will be more the value of the shares. But, I am unable to accept this contention because, firstly, the valuation was made only for the purpose of wealth-tax where the assessees always try to take the minimum value to reduce the tax burden to the extent it is acceptable to the department whereas the real value may be more if taken by break-up method unlike the yield method which was adopted in this case. The trust deed itself talks only of the break-up method giving emphasis to the real value of the assets held by the company, particularly in the case of a closely held company as in this case. It is, therefore, apparent that neither the author nor the trustee can declare the trust to be extinguished by adopting the estimated value that is accepted by the income-tax department, as the basis for the claim that the value of the corpus has become less than the outstanding debts, because while the figure of the outstanding is certain, the value of the assets is remote and uncertain. In case of the valuation of the shares which may fluctuate from time to time, it is significant to note that what may be considered to be a sick company at one point of time may become a flourishing one even if it had been taken through some disasters, and unless the shares are actually liquidated it is not possible to postulate that at any point of time the trust has become extinguished only because on that date the estimated value of the shares was less than the outstanding liability. The argument of learned counsel for the respondents was that the extinguishment was not by an act of the third respondent either as an author or the trustee but by operation of law at the time when the value of the shares was below the outstanding liability. Learned counsel was also at pains to remove any impression that this action was not bona fide. We are not concerned with the question whether the third respondent took the step bona fide of not, as the real issue is only whether there could be an extinction of the trust by reason of the trustee, or author estimating the value of the assets to be less than the outstanding liabilities. As discussed above, since the valuation would fluctuate from time to time it is not possible to accept this contention, as the claim under section 77 that the trust property is unavailable or that the corpus has become exhausted by the outstanding dues, has to be established in actual fact and not by an assumption. With reference to section 77(c), there cannot be an extinguishment by operation of law but only by the happening of an event, viz., that the corpus is wiped off actually by realisation to clear off the trust debts akin to destruction. Unless the corpus is liquidated and reduced to nil by paying off the outstanding debts, it is not possible to claim that the trust has become extinguished under section 77(c). Learned counsel for the respondent submitted that the trust deed did not provide for sale of the shares and since the income beneficiaries have no interest in the shares and the corpus beneficiaries are not entitled to anything until determination of the trust, which will arise only at a point of time when the last of the beneficiaries attains majority, neither of them had any right to question the discretion of the trustee to declare that the trust has become extinguished. The decisions in CIT v. B.A Sanghrajka Trust [1990] 181 ITR 484 (Bom) and Gosar Family Trust v. CIT [1995] 215 ITR 55 (SC) ; [1995] 4 SCC 576 relied on by learned counsel for the respondent were rendered under the direct tax laws and related to the concept of beneficiary for the purpose of income-tax assessment where the accrual of income or the right to receive the corpus would be a crucial test. Quite to the contrary, the real issue here is whether the third respondent as a trustee can claim that his earlier declaration that he was not the beneficial owner of the shares has become untenable because of extinguishment of the trust by operation pf law. As pointed out by learned counsel for the petitioners, the third respondent in his oral evidence had admitted that if 15½ per cent. of the shares held by the trust were sold at even 60 per cent. of its face value, it would have fetched about a crore and seventy three lakh rupees Another admission by him was that the balance-sheets of AMF show only an amount of Rs. 10,09,000 as due from the trust and no money is shown to be owed by him after assuming the shares held by the trust in his own name. The outstanding amount of interest was also written off by the company. In the circumstances, it is not possible to accept the claim of the third respondent that the trust had become extinguished by operation of law particularly when it is demonstrated by the petitioners that in fact there is no outstanding liability at present exceeding the intrinsic value of the shares. Hence, my finding on this issue is that there was no extinguishment of the trust and in fact, there cannot be any extinguishment of the trust by operation of law.

Issue No. 2. — As discussed above, the provisions of section 83 come into operation only if there is an extinguishment of trust under section 77. Since I have found that there is no extinguishment of the trust, there is no question of reversion of the trust property to the author. More significantly, the trust property which was declared in the deed was only the sum of Rs. 1,116. The shares were actually purchased with borrowed funds and the shares form part of the corpus of the trust but did not originally belong to the author of the trust. As long as the shares exist and form part of the corpus of the-trust, there is liability on the part of the trustees to hold it for the benefit of the beneficiaries. Since the trust is declared to be irrevocable, the interest of the author has ceased according to the declaration of the trust and he has no right except in terms of section 83 to get back any part of the corpus of the trust even assuming that the shares subsequently purchased by borrowed funds would be declared as property of the trust by the author. It follows that no part of the trust can be treated as the property of the third respondent and he cannot declare any beneficial interest in the property for himself. This conclusion, however, does not lead to the inference that the petitioners are the owners of the shares. The petitioners are entitled only to the distribution of income as and when given. They have no right to receive the corpus. Only the heirs of the first, fourth, fifth and sixth petitioners are entitled to the corpus on the last of them attaining majority. Hence, it is not possible to declare the petitioners as owners of the shares for even if the third respondent is recorded as a trustee the shares would continue to be trust property and whoever holds it has to hold it only as a trustee and not as beneficial owner until the time for distribution of the corpus arrives. In any event, section 155 provides only for rectification of an entry in the register of members and cannot permit a declaration of title except as a step in the process of deciding whether there is an error requiring rectification. Hence, my finding on this issue is in the negative and against the petitioners.

Issue No. 4. — The accepted position is that the original declaration was given by the third respondent within the meaning of section. 18 7C and the original entry in the register of members read as follows:

"Sri Anam Venkata Reddi, Chairman, Anam Venkata Reddi Family Trust, Kadiyam."

After the execution of the extinguishment deed, the entry was changed to read as follows:

"Transmitted to Sri A.V. Reddi (individual) on extinguishment of the trust."

The respondent claims in his counter-affidavit that he had made declaration under section 187C(3) and that was the reason why this change was effected. However, even if a declaration is made and the third respondent claimed that the trust had become extinguished, the entry in the register cannot be changed unless the matter is considered by the board of directors. The articles of association of the first respondent-company provided for registering transfers of shares only by resolution of the board. In the case of transmission by devolution by inheritance of shares also, the board of directors have the power to call on the executors of the deceased member to transfer the shares to a named person. In an unreported decision of the Madras High Court in the case of V.G. Sundararaj v. New Theatre Carnatic Talkies Private Limited (O.S.A. No. 62 of 1982, dated January 18, 1991), it was held that where there was a decree for specific performance to register a share transfer, the register of members cannot be altered without following the procedure of the matter being considered by the board of directors. I am of the opinion that even if section 187C(4) provides that where a declaration is made under subsection (1), (2) or (3), the company shall make a note of such declaration in its register of members, the matter would have to be placed before the board of directors for acceptance. Where a shareholder declares that he does not hold beneficial interest, that declaration is against his interests and can, therefore, be accepted on its face value. But, when the same shareholder declares subsequently that the beneficial interest is reverted back to him, the principles of natural justice would require that the persons whose names have been registered as having beneficial interests must be notified and their objections taken before recording the declaration under sub-section (3). Even though the section does not provide for such an opportunity, or consideration by the board of directors, I am of the opinion that the principles of natural justice, by necessary implication, form part of the process, and by merely recording a declaration made under section 187C(3), the beneficial interest in others which is declared earlier by the same holder of the shares, cannot be wiped off. Courts have held that the principles of natural justice are attracted and there is an implied, obligation to give notice even though the relevant Act or rules made no express provision for it, wherever the rights of a person are affected by a proposed action under the statute (see H.M. Seervai's Constitutional Law of India, para. 16.537, at page 1759). Admittedly, the matter was never placed before the board of directors.

Learned counsel for the respondent submitted that the matter was not required to be placed before the board meeting since it was not a case of transfer but only a case of extinguishment by operation of law. I have already held that there was no extinguishment at all. It was further stated that under section 297(5), matters required to be placed before the board would only be voidable and not void if omitted to be placed before the board. Even on the same analogy, a matter which affects the rights of the shareholders if it had not been placed before the board would be open to be questioned by the shareholders. The argument of learned counsel for the respondent that none of the income beneficiaries had any subsisting rights and none of the corpus beneficiaries had any present rights and therefore, they were not the persons affected so as to be given notice of the change in the entry, is also untenable. Under section 155, any member can apply for rectification and the issue is not only of the ownership but also of the voting rights, for if the existence of the trust is accepted by the company, then the voting rights of the trust can be exercised by the public trustee to see that the other members of the company are treated fairly in the functions of the company. Hence, I am convinced that before recording a change under section 187C(3), the other members of the company were entitled to notice.

Looking into the provisions of section 155, it is seen that if the name of a person after having been entered in the register is without sufficient cause omitted therefrom, it would be a matter for rectification. In the present case, in view of my finding that the trust was not extinguished and the beneficial interests in the shares did not revert to the author, viz., the third respondent, the omission of the earlier declaration regarding the beneficial interest of the petitioners is without sufficient cause. Moreover, the fresh entry made was to the effect that there was transfer by operation of law. That statement, as I have found earlier, is erroneous inasmuch as there could not be any extinguishment by operation of law under section 77 of the Trusts Act as claimed in the extinguishment deed. Thus, it has been established by the petitioners that the subsequent entries made in the register of members constitute an error and required to be deleted so that the original entry is restored and maintained. I, therefore, order the petition, in terms of the amended prayer (d) and (e) by directing the first respondent to rectify the entries newly made at folios 38 and 39 by deleting the words "transmitted to A.V. Reddi (individual) on extinguishment of the trust" and, consequently, the original entries of folios 38 and 39 shall remain intact. In the circumstances of the case, no order as to costs.

[1985] 57 COMP. CAS. 477 (MAD.)

HIGH COURT OF MADRAS

P.R. Ramakrishnan

v.

A. Mounaguruswami

NATARAJAN, J.

CRIMINAL MISCELLANEOUS PETITION NO. 2259 OF 1979 IN COMPANY CASE NO. 251 OF 1979.

JULY 7, 1983

N.T. Vanamamalai for C. Krishnan and S. Ashok Kumar for the Petitioners.

N. Natarajan and S. Jagadeesan for the Respondent.

JUDGMENT

Natarajan, J.—The petitioners seek quashing of the proceedings in C.C. No. 251 of 1979 on the file of the Judicial First Class Magistrate, Coimbatore. The case arises out of a private complaint filed by the respondent herein against the petitioners and a public limited company, to wit, Radhakrishna Mills Ltd., which has been arrayed as the fifth accused in the case. The complaint has been taken on file under ss. 108A, 187C(2) and 308(3) of the Companies Act.

The averments of the respondent in the complaint filed by him are to the following effect.

The complainant is a shareholder in Radhakrishna Mills Ltd., the fifth accused, and holds 240 equity shares. The board of directors of the mill is composed mainly of two families, one, that of Sri R. Venkataswami Naidu and his sons and the other, that of the first accused and his three sons, viz., accused Nos. 2 to 4. There are only two outsiders in the board, viz., one R. Palaniswami Naidu and one A. Narayanaswami Naidu. The first accused is, therefore, virtually controlled by the two families mentioned above. However, there appears to be some disputes between the two families and each family is attempting to gain control of the company. The complainant is not interested in the dispute between the two families, but as a shareholder he is interested in the proper management of the affairs of the company. The complainant found that a large number of shares in the fifth accused company had been purchased in the names of persons who do not actually hold them and that the purchasers were holding the shares benami for the benefit of accused Nos. 1 to 4. The complainant has given a list of the benami shares in the schedule attached to the complaint. The complainant gained intelligence about the purchase of benami shares by accused Nos. 1 to 4 after making an inspection of the relevant records of the company. On making the inspection, the complainant was shocked to notice that over 32,000 shares had been purchased by accused Nos. 1 to 4 within the months of July to September, 1978. He found many of the transferees to be either clerks or automobile drivers or other employees serving under the effective control of accused Nos. 1 to 4. The other benami transferees are obliged to the accused. The holders of the shares do not have the pecuniary capacity to acquire the shares. Moreover, they would never have invested moneys in the purchase of shares in the company as they are hopelessly unproductive and there is no chance of these shares bearing dividends in the near future. As a matter of fact, the shares have been selling at a low price (below par) for quite a number of years. Accused Nos. 1 to 4, of whom the first accused is the head, and the concerns over which they exercise control, already hold 48,842 shares, viz., 19.36 per cent. of the total number of equity shares. The break-up figures of the shareholders are as under

shares
1.	First accused	12,510
2.	Smt. Rajeswari Ramakrishnan (first accused's wife)	2.060
3.	Second accused	3,740
4.	Third accused	2,050
5.	Fourth accused	1,450
6.	Smt. D. R. Durgamba & fourth accused	380
7.	Jeypore Sugars Ltd.	16,601
8.	Ramakrishna Machinery Corporation Pvt. Ltd.	6,345
9.	R. S. Industrial Corporation (P.) Ltd.	1,661
10.	Krishna Industrial Corporation Ltd.	2,040

If the 32,000 odd additional shares acquired benami by accused Nos. 1 to 4 are added to the shares already held by their group, the total holdings of the group headed by the first accused will exceed 25 per cent. of the paid-up capital of the company. However, accused Nos. 1 to 4 have not obtained the permission of the Company Law Board under s. 108B for such acquisition. In order to bypass the mandate contained in s. 108A, accused Nos. 1 to 4 have acquired the shares benami in the names of third parties. There is, therefore, a contravention of s. 108A of the Companies Act. Moreover, there is also contravention of the provisions of s. 108C and s. 302 of the Companies Act, because a person having a beneficiary interest in a class or classes of shares of a company should declare the same to the company within thirty days of such acquisition. Contrary to the provisions of law, there has been no such declaration by accused Nos. 1 to 4 to the company. That apart, under s. 308 of the Companies Act, the directors of a company have to give notice to the company of their shareholdings in order to enable the company to comply with the provisions of s. 307. Accused Nos. 1 to 4 have not given the required notice to the company as enjoined by law. The complainant sent a letter to the company (fifth accused) to retransfer the shares to the original holders and to give him an assurance that the benami shareholders would not be allowed to vote in the general body meeting held on July 30, 1978. Since no reply was received, the complainant sent a further letter to the chairman of the meeting requesting him not to take into consideration the votes of the benami shareholders, but in spite of the request, the shareholders holding shares benami for accused Nos. 2 to 4 exercised their votes against the re-appointment of the auditors and they had thus contravened s. 108 of the Companies Act. The complainant sent such a letter to the chairman against the benami shareholders, because he was of the view that they may have signed the forms without the requisite mens rea to violate the provisions of the Act. Furthermore, the benami shareholders are helpless persons as they are under the effective control of accused Nos. 1 to 4 and cannot, therefore, raise any protest. Accused Nos. 1 to 4 have been collecting proxies from shareholders even long before the annual general meeting held on July 30, 1978, in order to get a majority of the votes for themselves. As a shareholder, the complainant is interested in the fair management of the affairs of the company and it is for that purpose, he is forced to file a complaint against the accused. The complainant has furnished a list of witnesses who are to depose in the case to prove the averments in the complaint. On such averments, the complainant has prayed for the case being taken on file and an enquiry held and for the accused being punished for the offences committed by them.

As already stated, though contravention of several sections is complained of, the complaint has been taken on file only under ss. 108A, 187C(2) and 308 of the Companies Act.

The petitioners seek quashing of the proceedings on the ground that the complaint does not disclose the commission of any offence by them, that the averments in the complaint are vague and indefinite, that the complaint is based on mere surmises and assumptions, that even if the witnesses cited by the complainant give evidence in support of the complaint, their testimony cannot establish the commission of any offence by the petitioners, that the complaint is an after-thought and has presumably been filed as a counter-blast to another complaint filed by the petitioners against other directors and that if, in such circumstances, the trial is allowed to proceed, it would only open the floodgates of persecution against directors and companies in such a manner as to stifle and thwart all corporate business, industrial and mercantile activity, by motivated, dissatisfied or mischievous persons.

Arguing the case of the petitioners, Mr. Vanamamalai, the learned counsel, referred to various features in the case which, according to him, entitle the petitioners to seek quashing of the proceedings. He pointed out that even according to the complaint, the alleged purchase of benami shares was about ten months prior to the filing of the complaint and that there had been no whisper till then about the shares having been purchased benami. The counsel stated that if the shares had been purchased benami, the matter would have been known to people in the office as well as in the share market. He emphasised the fact that while, in the schedule attached to the complaint, the names of 28 alleged benami purchasers of shares are mentioned, the complainant has cited in the complaint only four of the alleged purchasers, namely, Nos. 4, 6, 13 and 14, who have been arrayed as witnesses Nos. 7, 4, 5 and 6 in the complaint, and, therefore, the alleged purchase of shares by the other 13 persons has to stand only on the ipse dixit of the complainant. The counsel then argued that even if witnesses Nos. 4 to 7 in the complaint are going to get into the box and give evidence supporting the complaint, it would only mean that the petitioners had purchased 1,430 shares and by the acquisition of those shares, the petitioners cannot be accused of having acquired more than 25 per cent. of the shares in the company. The further contention, in this behalf, was that if the petitioners are to be held guilty of contravening s. 108A of the Companies Act, it should be proved that they had acquired more than 14,400 shares in addition to their present holdings, but in this case, the complainant will be able to prove the purchase of only 1,430 shares and the acquisition of those shares will not take the holdings of the petitioners to more than 25 per cent. of the shares in the company.

Another contention put forward by Mr. Vanamamalai was that none of the purchasers of shares had told anyone about their being benamidars for the petitioners. The complainant claims to have discovered the purchase of the benami shares by the petitioners by making an inspection of the records and registers of the company and, therefore, there is reason to think that the persons cited as witnesses in the complaint should have been subsequently induced to make allegations against the petitioners so that the petitioners' interests will be harmed.

On another ground also, Mr. Vanamamalai attacked the complaint. He pointed out that there is no mention in the complaint as to who among the petitioners had purchased shares benami and, in the absence of a specific averment, the petitioners cannot be generally charged for having acquired shares benami for themselves. The averment in the complaint that "many of the transferees were either clerks or automobile drivers and other employees of the petitioners and serving under their effective control", was disputed by Mr. Vanamamalai and he referred to the fact that only one person is a driver and one person is a clerk in the Coimbatore Institute of Technology and, therefore, it will be wrong to say that all the persons mentioned in the complaint are employees of the petitioners.

Arguing contra, Mr. Natarajan, learned counsel for the respondent-complainant, stated that the Magistrate was prima facie satisfied about the averments in the complaint and had, therefore, taken the case on file and, as such, the complainant should be given an opportunity to prove his case and the petitioners should not be allowed to thwart the proceedings by having the matter quashed without a trial taking place.

Before examining the contentions of the parties, it would be useful to refer to ss. 108A, 187C(2) and 308 of the Companies Act (hereinafter referred to as "the Act"), which the petitioners are alleged to have contravened. Sections 108A to 108H were newly introduced by the Companies (Amendment) Act XLI of 1974. Section 108A reads as follows

"108A. Restriction on the acquisition of shares.—(1) Except with the previous approval of the Central Government, no individual, group, constituent of a group, firm, body corporate, or bodies corporate under the same management, shall jointly or severally acquire or agree to acquire, whether in his or its own name or in the name of any other person, any equity shares in a public company, or a private company which is a subsidiary of a public company, if the total nominal value of the equity shares intended to be so acquired exceeds, or would, together with the total nominal value of any equity share already held in the company by such individual, firm, group, constituent of a group, body corporate or bodies corporate under the same management, exceed twenty-five per cent. of the paid-up equity share capital of such company.

(2) Any person who acquires any share in contravention of the provisions of sub-section (1), shall be punishable with imprisonment for a term which may extend to three years, or with fine which may extend to five thousand rupees, or with both".

This section was introduced in order to meet the cases of " take-over " bids by groups of companies, as they are apt to adversely affect the interests of non-controlling shareholders, particularly public financial institutions, as they are kept in the dark while secret negotiations are entered into with those having control of a company. Originally, the recommendation was that the proposed restrictions would apply to companies having a total paid-up capital of not less than Rs. 25 lakhs and private companies which are subsidiaries of such public companies. The proposal was subsequently modified and the restriction has been made to apply to public limited companies with a share capital of Rs. 20 crores or more. Consequently, s. 108H was enacted to govern the application of ss. 108A, 108B, 108C and 108D, to such companies to which the provisions of Part A of Chapter III of the MRTP Act, 1969, apply. In the instant case, though it is not mentioned in the complaint, it has been ascertained from counsel that the fifth accused has been registered under the provisions of Part A of Chapter III of the MRTP Act, 1969. Therefore, what needs consideration is whether there has been an acquisition of shares by the petitioners in contravention of s. 108A of the Act.

Section 187C is also a new section inserted by the Companies (Amendment) Act XLI of 1974. It comprises of seven sub-sections. Under sub-s. (1) any person whose name is entered as a shareholder in the register of members of a company, but who does not hold the beneficial interest in such shares should make a declaration to the company specifying the name and other particulars of the person holding the beneficial interest in the shares. Sub-s. (2) casts a similar duty of making a declaration to the company on the person holding the beneficial interest in the shares of a company standing registered in the names of other persons. It is this provision which the petitioners are alleged to have contravened by reason of their having failed to make a declaration to the company about the holding of benami shares by them. It is then necessary to refer only to sub-s. (5) for the purpose of this case, which is the penal section and it lays down that any person contravening sub-s. (1) or sub-s. (2) or sub-s. (3), without any reasonable excuse to do so, is punishable with fine which may extend to one thousand rupees for every day during which the failure continues.

Lastly, we have s. 308. This section deals with the duties of a director in giving notice to the company of such matters relating to himself as may be necessary for the purpose of enabling the company to comply with the provisions of s. 307. Sub-s. (3) is the punishment section and lays down that any person who contravenes sub-ss. (1) and (2) of s. 308 shall be punishable with imprisonment for a term which may extend to two years or with fine which may extend to five thousand rupees or with both.

It is with reference to these sections, we have to examine the complaint to find out whether a prima facie case exists for the proceedings to go on or whether the complainant's averments are of such a nature that no case at all is made out against the petitioners and, therefore, if the trial proceeds, it will only prove to be an exercise in futility.

Examining the first accusation of the complainant that the petitioners have acquired 32,000 odd shares benami and have thereby swelled up their total holding of shares beyond the 25 per cent. limit fixed by s. 108A, the complainant has not specifically stated the number of shares acquired by each of the petitioners and furthermore, who the benami shareholders are for each person. On the other hand, the averment in the complaint is that "they (benami shareholders) hold it benami for the benefit of accused Nos. 1 to 4". In the very nature of things, the accusation is a loose and vague one. The complaint should set out specifically how much of benami shares have been acquired by each of the petitioners. Even assuming that there has been acquisition of benami shares, it may well be that not all the four petitioners have acquired shares and it is only one or two or three of the petitioners who have acquired the shares. If that be the case, it automatically follows that such of those petitioners who have not acquired shares cannot be prosecuted for the purchase of benami shares by the other petitioners. Mr. Natarajan, learned counsel for the respondent-complainant, would say that accused Nos. 1 to 4 act as a group. But, the word "group" has a definite connotation under the Companies Act. It may be that the first petitioner is the father and petitioners Nos. 2 to 4 are his sons. But, even so, the question is. still open whether they would constitute a group under the Act. In this context, it is relevant to refer to s. 2(18A) which gives the definition of "group". The definition reads as follows:

" 'Group' means a group of two or more individuals, associations, firms or bodies corporate, or any combination thereof, which exercises or is in a position to exercise, or has the object of exercising control over any body corporate, firm or trust".

There is an Explanation to this definition, and it runs as follows :

"Explanation.—If any question arises as to whether two or more individuals, associations, firms or bodies corporate, or any combination thereof, constitute, or fall within a 'group', the Company Law Board shall, after giving such individuals, associations, firms or bodies corporate, or any combination thereof, a reasonable opportunity of being heard, decide the same".

Therefore, it is the Company Law Board which can make an authoritative pronouncement whether two or more individuals, associations, etc., constitute a group or not under the Act. In this case, there is no averment in the complaint that the Company Law Board has given a finding that petitioners Nos. 1 to 4 constitute a group. In the absence of such a finding by the Company Law Board, the court cannot proceed on the assumption that petitioners Nos. 1 to 4 constitute a group within the meaning of the Act. There is also another aspect of the matter to be taken note of in this connection. In paragraph 4 of the complaint, reference is made to ten persons as constituting the group of the first petitioner in the company. While petitioners Nos. 1 to 4 are enumerated as Nos. 1 and 3 to 5, the second enumerated person is Smt. Rajeswari Ramakrishnan, wife of the first petitioner. The sixth enumerated persons are Smt. D. R. Durgambal and the fourth petitioner. Then Nos. 7 to 10 are certain companies incorporated under the Act. Therefore, when the complainant says that shares have been acquired by the group of the first petitioner and then, according to him, the group of the first petitioner consists of nine other persons besides him, it becomes incomprehensible as to how he can attribute the acquisition of shares only to petitioners Nos. 1 to 4, viz., accused Nos. 1 to 4. In such circumstances, there is an insurmountable feature of uncertainty in the case, the uncertainty being whether the acquisition of benami shares is by one or more or all the four petitioners, or whether the acquisition is also by the other members of the alleged group of the first petitioner. In view of this uncertainty, the Magistrate cannot take cognizance of the case against petitioners Nos. 1 to 4 and it will not be proper to say that in spite of the uncertainty in the case, the trial should proceed against all the petitioners and if any one or more of them is or are not found to have contravened s. 108A, he or they can be acquitted after they go through the ordeal of a trial.

Then, comes the question, whether there is apparent material in the complaint to suggest an inference that the petitioners have acquired benami shares beyond the permitted limit without conforming to the provisions of s. 108A. According to the complainant, "Accused Nos. 1 to 4 of which the first accused is the head and the concerns over which they exercise full control already hold 48,842 shares, viz., 19.36 per cent. f the total equity shares of the fifth accused company". If that be so, the total number of shares issued should be about 2,52,283. Twenty-five per cent. of the total shares would come to 63,071. Giving set-off to the shares now held, the petitioners can well acquire additional shares to the tune of 14,229, without offending the provisions of the Act. Though, in the complaint, it is alleged that 32,000 odd shares have been acquired, the complainant has cited only four persons to speak about the acquisition of benami shares in their names. The total number of shares purchased by them, as already mentioned, is only 1,430. Hence, even if they depose in favour of the complainant, the petitioners cannot be held guilty of having contravened s. 108A. Mr. Natarajan argued that the witnesses cited in the complaint may not only speak to the purchase of shares in their names, but may speak about the purchase of shares in the names of others. But, this contention cannot be countenanced. That is because of the fact that the statute casts an obligation both on the benami shareholder as well as the beneficiary to disclose to the company the purchase and holding of such shares. It would, therefore, not only be inadvisable, but also dangerous, for any court to accept the evidence of someone regarding the purchase of shares by third parties benami for another and render any finding, because the holder of the share will be greatly prejudiced by any adverse finding rendered against him by the court. In fact, if a person holds a share benami for another and fails to disclose it, he becomes punishable under s. 187C(5) for contravention of s. 187C(1). The punishment is as high a fine which may extend to one thousand rupees for every day during which the failure continues. Having regard to the serious nature of the offence and the penalty provided for it, it would be highly improper for any court to render a finding against anyone that he is holding shares in a company benami for another, on the evidence of some other shareholder or shareholders. Such being the case, I see considerable force in the contention of Mr. Vanamamalai that even if the four shareholders named by the complainant come and give evidence against the petitioner in the case, it would only mean that the petitioners have acquired 1,430 shares in order to have beneficial interest in these shares themselves. When the acquisition of such shares will not carry the total holdings of shares by the petitioners beyond the prescribed limit of 25 per cent., it can never be said that there is prima facie evidence that the petitioners have contravened s. 108A of the Act.

In the course of arguments, it was urged on behalf of the complainant that drivers and clerks could not have purchased shares by themselves and it is, therefore, obvious that they should have purchased the shares benami for the petitioners. On the other hand, Mr. Vanamamalai argued that even drivers and clerks of companies are paid well these days and that, as such, they would have been able to command funds for purchase of shares. He also argued that even, according to the complainant, there is a scramble between two families for purchase of shares and in view of that the share prices had fallen. Therefore, he stated that taking advantage of the situation, the drivers and clerks could have made speculative purchases in order to strike a bargain between the two groups and sell the shares to them at an appropriate stage for considerable profit. Considering this aspect of the matter, I think there is a good deal of force in the contention of Mr. Vanamamalai. The status of the witnesses cited by the complainant is not such that by one stroke of the pen it can be said that they are not men of means and, as such, they would not have purchased the shares for themselves, but should have only lent their names for purchase of shares by others.

Proceeding onwards, on the alleged contraventions of ss. 187C(2) and 308, the contention on behalf of the complainant is that even if an offence under s. 108A is not prima facie made out, there can be no answer by the petitioners to their having purchased shares benami in the names of the four witnesses named in the complaint and their failing to make the declarations and returns under s. 187C(2) and 308 of the Act. On the face of it, this contention may look an appealing one. But, if the matter is viewed in a wider perspective, it will be seen that it cannot be accepted. I have already pointed out that under s. 187C(1) there is an obligation cast on the holder of a benami share to make a declaration to the company specifying the name and other particulars of the person who holds the beneficial interest in such share. I have further pointed out that under sub-s. (5) the holder of a benami share is also punishable, even as the person holding the beneficial interest in a benami share is punishable for failure to make the necessary declaration to the company about the holding of the benami share. The punishment provided is a fine which may extend to one thousand rupees for every day during which the failure continues. It is in the light of this penal provision the contention of the complainant that the witnesses cited by him have purchased shares benami for the petitioners should be examined. If the witnesses had purchased shares benami, they ought to have made a declaration to the company under s. 187C(1). If they have failed to do so, they are liable for prosecution and punishment under sub-s. (5). Such being the case, what falls for consideration is whether these witnesses would come and make incriminating statements against themselves and make themselves liable for prosecution under s. 187C(5). The preponderance of a probability is that they would not come and give evidence against themselves in court. Assuming, for argument's sake, that they would be prepared to give such evidence, the question would be whether such evidence can be accepted and acted upon, because it would be the evidence of accomplices. The possibility of the witnesses making incriminating statements in the witness box on the instigation of third parties inimically disposed towards the petitioners cannot be ruled out. If these witnesses do come and give evidence against the petitioners, the question would naturally arise why they had kept quiet for a period of ten months and suddenly took it into their minds to disclose to the complainant and others that they are name-lenders for the shares acquired by the petitioners and that they are prepared to give evidence about it in court. The strong possibility is that there should have been sufficient inducement to the witnesses to come and give evidence against the petitioners and their willingness to give evidence cannot be due to a desire on their part to reveal the truth or to make their conscience free. Over and above these things, there is the fact that there is no material to show that till today the witnesses have made a declaration to the company under s. 187C(1) stating that they are benami shareholders. The question will be whether these witnesses can be allowed to come and depose something in court when they have failed to make a declaration under s. 187C(1). I think not, for, if such a course is encouraged, then it would be open to any shareholder to threaten a director of a company and hold him to ransom by saying that without making a declaration to the company under s. 187C(1), he will give evidence against the director in a court of law and see to it that the director is punished. Sub-ss. (1) and (2) of s. 187C are of such a nature that a court cannot act on the unilateral statement of either party alone in court against the other without making a declaration under s. 187C(1) or (2), for it will lead to unhealthy practices by the shareholders and directors of a company.

Since ss. 187C(2) and 308 are closely connected, it follows that unless irreproachable and incontrovertible materials are available to hold that a prima facie case of contravention of these two provisions has been made out, the court will not be justified in taking cognizance of a case and making a roving enquiry at the request of a complainant.

For the aforesaid reasons, I am of the opinion that the contention of the petitioners that the complaint does not disclose the commission of any offence, is well founded. The case suffers from the several infirmities set out above, which go to the root of the matter. Consequently, the ratio laid down in Dr. Sharda Prasad Sinha v. State of Bihar, AIR 1977 SC 1754, can well be applied to this case. The Supreme Court has held in that case that if the allegations in a complaint or charge sheet do not constitute any offence, it is competent to the High Court, exercising its inherent jurisdiction under s. 482 of the Cr. PC, to quash the order passed by the Magistrate taking cognizance of the offence. Therefore, it follows that the proceedings relating to the complaint filed by the respondent-complainant deserve to be quashed. In this connection, I may also point out that if there had been a deliberate violation of the provisions of the Act, the Company Law Board would itself have taken action against the petitioners.

In the result, Criminal Miscellaneous Petition No. 2259 of 1979 will stand allowed and the proceedings relating to C.C. No. 251 of 1979 on the file of the Court of the Judicial First Class Magistrate, Coimbatore, will stand quashed.

[1987] 61 Comp. Cas. 106 (Kar)

High Court of Karnataka

Khajamiya Miransaheb Mujahid

v.

Peerapasha Miransaheb Mujahid

M.P. Chandrakantaraj Urs, J.

Regular Second Appeal No. 174 of 1985

March 25, 1986

W.K. Joshi for the appellant.

A.G. Holla for the respondent.

JUDGMENT

M.P. Chandrakantaraj Urs, J.—This is a second appeal against the concurrent findings of the courts below. The brief facts that may be necessary for disposal of this appeal may be stated and they are as follows:

The appellant in this court and the court below was the defendant in the trial court. The respondent correspondingly was the plaintiff in the trial court. The plaintiff brought the suit for a declaration that certain shares bought in the name of himself and the defendant were bought solely out of his money as a matter of convenience and the defendant's name was added on. On retiring from Government service, the plaintiff demanded the defendant to transfer his interest in the shares which were acquired in several companies registered under the Companies Act, 1956 (hereinafter referred to as "the Act"), as he was the true and the full owner thereof. The defendant refused. Therefore, a suit for a declaration that he was the absolute and sole owner of the shares in question described in the schedule to the plaint was filed.

The defendant resisted the same on the ground, while admitting the fact, that the plaintiff had supplied the funds with instructions to buy the shares in joint names, as gifts. The gift being complete, he was the equal owner of the shares along with his brother.

The trial court framed the following issues :

(1) Does defendant prove that the plaintiff has gifted half the amount of the purchase money in respect of suit shares to him and as such he is the owner of half share in the suit share?

(2) Whether the court fee paid is not proper ?

Additional issue was also framed to the effect :

Whether the suit of the plaintiff is barred under the provisions of sections 187C and 187D of the Act ?

Apparently, the burden was cast on the defendant in the light of the admission that the whole of the money for purchase of the shares was out of the funds of the plaintiff. As the defendant pleaded a gift, the burden was on him to prove the gift. On all the issues, the plaintiff succeeded in the trial court. The same was confirmed by the first appellate court. Therefore, the present appeal.

In this court, Mr. W.K. Joshi, learned counsel appearing for the appellant-defendant, has very fairly conceded that his client should fail or succeed entirely on the question of application of section 187C of the Act and no other. Section 187C of the Act, as amended by the Companies (Amendment) Act 41 of 1974, provides in sub-sections (1), (2) and (3) of the Act as follows :

"187C. (1) Notwithstanding anything contained in section 150, section 153B or section 187B, a person, whose name is entered, at the commencement of the Companies (Amendment) Act, 1974, or at any time thereafter, in the register of members of a company as the holder of a share in that company but who does not hold the beneficial interest in such share, shall, within such time and in such form as may be prescribed make a declaration to the company specifying the name and other particulars of the person who holds the beneficial interest in such share.

(2) Notwithstanding anything contained elsewhere in this Act, a person who holds a beneficial interest in a share or a class of shares of a company shall, within thirty days from the commencement of the Companies (Amendment) Act, 1974, or within thirty days after his becoming such beneficial owner, whichever is later, make a declaration to the company specifying the nature of his interest, particulars of the person in whose name the shares stand registered in the books of the company and such other particulars as may be prescribed.

(3) Whenever there is a change in the beneficial interest in such shares, the beneficial owner shall, within thirty days from the date of such change, make a declaration to the company in such form and containing such particulars as may be prescribed......"

From the three sub-sections extracted above, it is clear that a duty is cast upon the person holding the shares whether it is a trust or a person not being a trust, holding such shares in trust for the benefit of others impliedly or expressly to furnish the name to the company of such person or persons for whose benefit the shares are held. Similarly, sub-section (2) of section 187C of the Act clearly provides that the person who has a beneficial interest in the shares or a class of shares of a company shall within the time specified therein computed in the manner indicated therein make a declaration to the company concerned specifying the nature of his interest, particulars of the person in whose name the shares stand registered in the books of the company and such other particulars as may be prescribed, the prescription being by the Companies (Court) Rules framed under the enabling provisions of the Act. Similarly, sub-section (3) of section 187C of the Act also provides that whenever there is a change in the beneficial interest in such, shares or a class of shares by virtue of the beneficial interest passing to somebody else and that somebody else acquires the beneficial interest, he is required to disclose the nature of change and the extent of change and make a declaration to the company in such form and containing such particulars as may be prescribed.

Therefore, it is clear, the above sub-sections do not relate to ownership of shares, more so, when the ownership is in dispute. The three sub-sections, extracted above, presuppose the ownership vesting in a person other than the one who is entited to beneficial interest in the shares and the respective duties cast upon the ostensible owner of the share and the beneficiary or the person having benefit of the shares.

This becomes more clear by looking at section 187C(5)(a) and (b) of the Act. The application which I have indicated becomes very clear. That section reads as follows :

"187C(5)(a) If any person, being required by the provisions of subsection (1), sub-section (2) or sub-section (3), to make a declaration, fails, without any reasonable excuse, to do so, he shall be punishable with fine which may extend to one thousand rupees for every day during which the failure continues.

(b) If a company fails to comply with the provisions of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one hundred rupees for every day during which the default continues."

The consequences being penal for failure to perform the statutory duty imposed, the ownership of the share is not affected. He is only liable to pay the prescribed fine and no more. Similarly, he will be penalised for the default.

Thus viewed, in a civil suit between brothers as to who the true owner is, section 187C of the Act has no role to play. The failure of the defendant to report cannot be said to be penal because he was genuinely under the impression that he was holding it as a joint owner in his own right as a gift. Therefore, if action had been taken under the provisions of section 187C of the Act for failure to report the implied trust nature as claimed by the brother, it is highly improbable that the action would have resulted in penalty on the facts of this case.

All through, his case was that he was joint owner, having been gifted with half interest, and, therefore, the question of disclosure of either the nature of the trust, express or implied, or the nature of beneficial interest which his brother enjoyed would not at all arise.

In that view of the matter, the trial court and the lower appellate court have come to the right conclusion and this appeal must necessarily, therefore, fail.

Accordingly, the appeal is rejected.

[1987] 61 Comp. Cas. 106 (Kar)

High Court of Karnataka

Khajamiya Miransaheb Mujahid

v.

Peerapasha Miransaheb Mujahid

M.P. Chandrakantaraj Urs, J.

Regular Second Appeal No. 174 of 1985

March 25, 1986

W.K. Joshi for the appellant.

A.G. Holla for the respondent.

JUDGMENT

M.P. Chandrakantaraj Urs, J.—This is a second appeal against the concurrent findings of the courts below. The brief facts that may be necessary for disposal of this appeal may be stated and they are as follows:

The appellant in this court and the court below was the defendant in the trial court. The respondent correspondingly was the plaintiff in the trial court. The plaintiff brought the suit for a declaration that certain shares bought in the name of himself and the defendant were bought solely out of his money as a matter of convenience and the defendant's name was added on. On retiring from Government service, the plaintiff demanded the defendant to transfer his interest in the shares which were acquired in several companies registered under the Companies Act, 1956 (hereinafter referred to as "the Act"), as he was the true and the full owner thereof. The defendant refused. Therefore, a suit for a declaration that he was the absolute and sole owner of the shares in question described in the schedule to the plaint was filed.

The defendant resisted the same on the ground, while admitting the fact, that the plaintiff had supplied the funds with instructions to buy the shares in joint names, as gifts. The gift being complete, he was the equal owner of the shares along with his brother.

The trial court framed the following issues :

(1) Does defendant prove that the plaintiff has gifted half the amount of the purchase money in respect of suit shares to him and as such he is the owner of half share in the suit share?

(2) Whether the court fee paid is not proper ?

Additional issue was also framed to the effect :

Whether the suit of the plaintiff is barred under the provisions of sections 187C and 187D of the Act ?

Apparently, the burden was cast on the defendant in the light of the admission that the whole of the money for purchase of the shares was out of the funds of the plaintiff. As the defendant pleaded a gift, the burden was on him to prove the gift. On all the issues, the plaintiff succeeded in the trial court. The same was confirmed by the first appellate court. Therefore, the present appeal.

In this court, Mr. W.K. Joshi, learned counsel appearing for the appellant-defendant, has very fairly conceded that his client should fail or succeed entirely on the question of application of section 187C of the Act and no other. Section 187C of the Act, as amended by the Companies (Amendment) Act 41 of 1974, provides in sub-sections (1), (2) and (3) of the Act as follows :

"187C. (1) Notwithstanding anything contained in section 150, section 153B or section 187B, a person, whose name is entered, at the commencement of the Companies (Amendment) Act, 1974, or at any time thereafter, in the register of members of a company as the holder of a share in that company but who does not hold the beneficial interest in such share, shall, within such time and in such form as may be prescribed make a declaration to the company specifying the name and other particulars of the person who holds the beneficial interest in such share.

(2) Notwithstanding anything contained elsewhere in this Act, a person who holds a beneficial interest in a share or a class of shares of a company shall, within thirty days from the commencement of the Companies (Amendment) Act, 1974, or within thirty days after his becoming such beneficial owner, whichever is later, make a declaration to the company specifying the nature of his interest, particulars of the person in whose name the shares stand registered in the books of the company and such other particulars as may be prescribed.

(3) Whenever there is a change in the beneficial interest in such shares, the beneficial owner shall, within thirty days from the date of such change, make a declaration to the company in such form and containing such particulars as may be prescribed......"

From the three sub-sections extracted above, it is clear that a duty is cast upon the person holding the shares whether it is a trust or a person not being a trust, holding such shares in trust for the benefit of others impliedly or expressly to furnish the name to the company of such person or persons for whose benefit the shares are held. Similarly, sub-section (2) of section 187C of the Act clearly provides that the person who has a beneficial interest in the shares or a class of shares of a company shall within the time specified therein computed in the manner indicated therein make a declaration to the company concerned specifying the nature of his interest, particulars of the person in whose name the shares stand registered in the books of the company and such other particulars as may be prescribed, the prescription being by the Companies (Court) Rules framed under the enabling provisions of the Act. Similarly, sub-section (3) of section 187C of the Act also provides that whenever there is a change in the beneficial interest in such, shares or a class of shares by virtue of the beneficial interest passing to somebody else and that somebody else acquires the beneficial interest, he is required to disclose the nature of change and the extent of change and make a declaration to the company in such form and containing such particulars as may be prescribed.

Therefore, it is clear, the above sub-sections do not relate to ownership of shares, more so, when the ownership is in dispute. The three sub-sections, extracted above, presuppose the ownership vesting in a person other than the one who is entited to beneficial interest in the shares and the respective duties cast upon the ostensible owner of the share and the beneficiary or the person having benefit of the shares.

This becomes more clear by looking at section 187C(5)(a) and (b) of the Act. The application which I have indicated becomes very clear. That section reads as follows :

"187C(5)(a) If any person, being required by the provisions of subsection (1), sub-section (2) or sub-section (3), to make a declaration, fails, without any reasonable excuse, to do so, he shall be punishable with fine which may extend to one thousand rupees for every day during which the failure continues.

(b) If a company fails to comply with the provisions of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one hundred rupees for every day during which the default continues."

The consequences being penal for failure to perform the statutory duty imposed, the ownership of the share is not affected. He is only liable to pay the prescribed fine and no more. Similarly, he will be penalised for the default.

Thus viewed, in a civil suit between brothers as to who the true owner is, section 187C of the Act has no role to play. The failure of the defendant to report cannot be said to be penal because he was genuinely under the impression that he was holding it as a joint owner in his own right as a gift. Therefore, if action had been taken under the provisions of section 187C of the Act for failure to report the implied trust nature as claimed by the brother, it is highly improbable that the action would have resulted in penalty on the facts of this case.

All through, his case was that he was joint owner, having been gifted with half interest, and, therefore, the question of disclosure of either the nature of the trust, express or implied, or the nature of beneficial interest which his brother enjoyed would not at all arise.

In that view of the matter, the trial court and the lower appellate court have come to the right conclusion and this appeal must necessarily, therefore, fail.

Accordingly, the appeal is rejected.